Airdrome do not meet the requirements of the US Securities

Airdrome do not meet the requirements of the US Securities

Airdrop become a new and trendy way of crowdfunding in the cryptocurrency space. What started as a ploy, is now becoming the norm. It seems that no release of the blockchain without them will not pass. But what is airdrop, and why are they needed?

Airdrop is a new model of crowdfunding, in which the blockchain startups handing out “free” tokens (instead of selling them) to avoid falling under the regulatory rules of the SEC (securities and exchange Commission).

Recipients of these “free” tokens you often need to join the Telegram-community project, or promote it on Twitter, Facebook or Reddit. It’s a win-win for all: the blockchain startups to get funding, is gaining momentum thanks to the “free” promotion and marketing, create a great network of people, owning a token and getting the chance to get listed on a major cryptocurrency exchange.

Users on its part to get “free” money! Sounds amazing, isn’t it?

But it’s not as easy as it seems. Legally speaking, airdrop are not “free money”, and in most cases they do not seem to justify one of its key purposes: to avoid classification as a securities to get around SEC rules.

Let’s look at this statement through the prism of the following three legal arguments:

Howey Test

At first glance it seems that the free provision of tokens (e.g., airdrop) is not an offer of securities, because the recipients, technically speaking, don’t invest money (the first condition of the test Howie) or not put their money at risk and therefore do not expect a return on their investment (the second condition).

As it is logical it all sounds, the truth looks different. The concept of “money” more broadly defined and it includes not only cash. All types of services and actions (e.g. join a channel Telegram and marketing blockchain-project in social networks) that offer something of value, can be considered “money,” and, most likely, the SEC recognizes this and that is exactly what is considering airdrop.

Besides, he was already a precedent in the case against Harwyn Industries Corp., where the SEC argues that the absence of purchases of “free” promotions do not mean that no offers of sale because the purpose of the “gift” was to promote the product of the donor and not the charity.

Case TOMAHAWK EXPLORATION LLC

14 August 2018 David Laurence, the founder of Tomahawk Exploration LLC received two lifetime ban on any kind of stock trading and working in companies in leadership positions. This verdict is the result of a punishment from the regulator SEC for fraud in conducting the ICO. We will not go into the details of the case and focus on a small part of section 2 of the summary:

“Tomahawk issued tokens within the Bounty program, subsequently offering their free exchange for shares of any companies in the oil and gas sector”

The Bounty program, which the SEC drew the attention of the de facto airdrop, which only proves the above point — the SEC may consider the offer of “free” tokens in exchange for services (e.g., marketing in this case) as the offering of the securities.

While airdrop may seem absolutely new and unprecedented idea to bypass the rules of the regulators, in fact it is not. Four of the promoter and two Internet companies were found guilty of issuing “free shares” to recipients who were required

  • a) subscribe to the websites of the issuers
  • b) to attract new investors
  • c) to associate your own websites with the websites of issuers, thereby increasing their traffic on the site and giving them advertising.

Airdrop: legal conclusion

It becomes apparent that the use of airdrop as a means of “maneuvering” in the rules relating to the securities, is not such a good idea.

Rather, it is only a matter of time before the SEC will carefully consider the practice in the cryptocurrency sphere, and when this happens, some cryptocurrency projects can get serious problems.

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