A Safe Legal Harbor
Legal Disclaimer
The legal review is provided by SuperOne, for informational purposes only.
This whitepaper describes the current vision for the SuperOne platform. While we intend and attempt to realize this vision, please recognize that it is dependent on quite several factors and subject to quite a few risks. It is entirely possible that the SuperOne platform will only be implemented or adopted in a portion of our vision. We do not guarantee, represent or warrant any of the statements in this whitepaper, because they are based on our current beliefs, expectations and assumptions, about which there can be no assurance due to various anticipated and unanticipated events that may occur.
Please know that we work extremely hard in seeking to achieve the vision laid out in this whitepaper, but that you cannot rely on everything coming true. Blockchain, cryptocurrencies and other aspects of our technology and these markets are in their infancy and will be subject to many challenges, competition and a changing environment.
The SuperOne tokens are utility-use products permitting access to validation services provided by the SuperOne platform, as detailed above. SuperOne tokens are not intended for speculation and afford the holder no rights in, or claims to, any of the assets of SuperOne or to in any way share in any profits that SuperOne may achieve. Interested parties acknowledge agreeing to the Consent to Use Electronic Records, Privacy Policy, Token Sale Agreement and Terms and Conditions. This document is subject to change and must be accompanied by the previously agreed-to documents, which remain in effect regardless of purchase decisions.
Interested parties acknowledge that the SuperOne platform, as described herein, may never in fact operate as intended. A SuperOne token is intended solely as a mechanism for using the services offered through the SuperOne platform. As such, the SuperOne token may have a value of zero. SuperOne tokens are functional utility smart contracts within the SuperOne platform. SuperOne tokens are non-refundable. SuperOne tokens are not for speculative investment. No promises of future performance or value are or will be made with respect to SuperOne tokens, including no promise of inherent value, no promise of continuing payments, and no guarantee that Super tokens will hold any value. SuperOne tokens are not part of SuperOne and SuperOne tokens hold no rights in said company. SuperOne tokens are sold as a functional good and all proceeds received by SuperOne may be spent freely by SuperOne absent any conditions. Purchasing SuperOne tokens are intended for experts in dealing with cryptographic and blockchain-based software systems.
Legal Assement of the Game
Skill-based gaming has a well-established legal, social and commercial history. From classic board games to major sports tournaments, games of skill have long offered participants a chance to compete based on one’s ability. Today, games of skill are available on most major media sites, and are complemented by an emerging electronic sports (eSports) industry that lets professional gamers compete in popular video games with real money prizes at stake.
SuperOne is a platform that advances this trend, enabling skill-based multiplayer tournaments on mobile devices while offering gamers the ability to compete for real prizes.
Prize-based tournaments in games of skill are not considered gambling because the accepted definition of gambling involves three specific things; the award of a prize, paid-in consideration, and an outcome determined by chance. Without all these elements, a money-based competition is not gambling and thereby legal in most jurisdictions.
A game of chance is a game whose outcome is strongly influenced by some randomizing device, and upon which contestants may choose to wager money or anything of monetary value. A game of chance is one in which the result depends less upon the skill and experience of the player than upon purely fortuitous or accidental circumstances. A game of chance that involves anything of monetary value is, therefore, deemed to be gambling.
A game of skill might have an element of chance, but with skill playing a much greater part in determining the outcome. Players, through the use of outstanding skills, will eliminate the element of chance. It is regarded that although the element of chance necessarily cannot be entirely removed, it is one in which success depends principally upon the superior knowledge, attention, experience and skill of the player, whereby the element of chance or luck in the game is overcome, improved or turned to his advantage.
In SuperOne, one has to possess a considerable degree of knowledge of a category of subjects to succeed. With the additional time factor, the chance element is even further reduced. The skill is then not just knowing the correct answer, but answering a question faster than your opponents and building a score made up of correctly responded to questions.
With ten questions and two alternative answers, the degree of chance is so far reduced that it is made up of even less than 0.1% to determine winners. The element of knowledge, creativity, speed, uniqueness and clarity of expression combine in lessening the chance factor to almost zero.
Whether a game is a game of chance or a game of skill can determine whether it is legal in many countries or states. Many countries and states allow people to pay money to participate in games of skill but forbid paying to enter games of chance. In many cases, no laws have been written, as yet, governing the online gaming worlds and, where the law is lacking, governments, and courts have attempted to bridge the gap to regulate it. The regulation and legality of online skill gaming varies from jurisdiction to jurisdiction. In general, though; games of skill are in most jurisdictions freely allowed and do not require any further licensing subject to certain fulfilment of the skill elements.
In certain jurisdictions, there are conflicting laws and regulations, conflicting interpretations of applicable laws, divergent approaches by enforcement agencies and inconsistent enforcement policies. Moreover, the legality of online skill gaming may be subject to uncertainties arising from differing approaches among jurisdictions as to the determination of where skill gaming activities take place and which authorities have jurisdiction over such activities and those who participate in them and whether the domestic law applies to services offered from abroad.
SuperOne takes the clear distinction as being games of skill - and not games of chance - a difference which makes SuperOne legal in the majority of the world.
U.S. Skill Game Regulations
In the United States, the legality of skill based competition is determined at a state level, and extensive measures are required to ensure that a game offered is in full compliance with all applicable laws.
SuperOne games are allowed in roughly 80% of the world, including 80% of the US population in 41 states - the exceptions being Arizona, Arkansas, Connecticut, Delaware, Louisiana, Montana, South Carolina, South Dakota, and Tennessee.
Cash-based tournaments in games of skill are not considered gambling because the generally accepted definition of gambling involves three specific things: (1) the award of a prize, (2) paid-in consideration (meaning entrants pay to compete) and (3) an outcome determined on the basis of chance. Without all three of these elements, a competition that rewards real prizes is not gambling.
Games of skill require a physical or mental ability and a learned capacity to carry out a result. These games commonly include the use of strategy, tactic, physical coordination, strength, technical expertise, or knowledge.
Games of chance are games with an outcome strongly influenced by random chance or uncertainty. Common randomization devices include dice, playing cards, or numbered balls drawn from a container.
Games of chance may have some skill, and games of skill may have some chance, however, most U.S. courts use either the predominance test or the material element test to look at the role that skill and chance each take in determining the outcome of the game.
The Predominance Test
The predominance test is the most commonly used indicator of whether a game is skill- or chance-based. Under this test, one must envision a continuum with pure skill on one end and pure chance on the other. On the continuum, games such as chess would be almost at the pure skill end, while traditional slot machines would be at the pure chance end. Between these ends of the spectrum lie many activities containing both elements of skill and chance. A game is classified as a game of skill if the game falls predominantly closer to the skill end of the continuum.
The Material Element Test
The material element test is the second most commonly used test in the U.S. and is relied upon by 8 states to evaluate whether a game is skill or chance based. The test asks the question of whether chance plays a material role in determining a game’s outcome. As an example, in games like Minesweeper, a great deal of skill is generally exercised by players, but there are moments when players are forced to guess at random, with the results of that guess determining the winner and loser of the game. Skill predominates but chance plays the material role in determining the game’s outcome.
Play for Free Games
The “Play for Free” versions of the SuperOne games do not constitute gambling under U.S. law, as there is no paid-in consideration (meaning entrants do not need to pay to compete).
Compliance in the U.S.
SuperOne games are clearly defined as skill based games under the U.S. Federal and State laws, and could freely operate in 41 of 50 states. The 9 red flagged states have particular regulations preventing prize games in general.
In conclusion, SuperOne can - without any licensing - offer its games to more than 260 million Americans in the world’s largest and most sought after commercial market for sports, entertainment and advertising.
UK Skill Game Regulations
In the United Kingdom, they have adopted a regulatory approach to the industry rather than passing laws against it. The UK Gambling laws were overhauled as a result of European Union directives and internal market pressures for standardization across the EU as well as a Political response to the prohibition of gambling in the United States.
The law which governs these issues in the United Kingdom, is the Gambling Act 2005. Section 339 of the Act provides that participating in a competition or other arrangement under which a person may win a prize (a ‘prize competition’) is not gambling for the purposes of the Act unless it constitutes gaming, betting, or participating in a lottery.
Gaming Regulations
Section 6 of the Act defines gaming as “playing a game of chance for a prize”. A game of chance includes games involving both chance and skill, even where the chance element can be eliminated by superlative skill.
The Gambling Commission released guidance in December 2009 to clarify the meaning of prize competitions and free draws, which do not require licensing under the Act (Gambling Commission, “Prize competition and free draws: The requirements of the Gambling Act 2005”, December 2009).
According to this guidance, a prize competition is “one where success depends on the exercise of skill, judgment, or knowledge by the participants and does not, as it does in a lottery, rely wholly on chance.” However, per Section 14(5) of the Act, “a process which requires persons to exercise skill or judgment or to display knowledge” shall be treated for the purposes of this section as relying wholly on chance if;
The requirement cannot reasonably be expected to prevent a significant proportion of persons who participate in the arrangement of which the process forms part from receiving a prize; and
The requirements cannot reasonably be expected to prevent a significant proportion of persons who wish to participate in the arrangement from doing so.
It follows from this that a genuine prize competition is one that contains a requirement to exercise skill or judgment or to display knowledge and where it can reasonably be expected that the requirement will either;
Prevent a significant proportion of people who wish to participate from doing so (section 14(5)(b) of the Act); or
Prevent a significant proportion of people who participate from receiving a prize (section 14(5)(a)).
If either one of these barriers to entry or success can be shown, the process will not be deemed to rely wholly upon chance, and the arrangement will not be a lottery.
The 2009 Guidance gives two examples of what would and would not constitute a prize competition;
On the one hand, a crossword puzzle, where entrants have to solve a large number of clues and where only fully completed entries are submitted, is an obvious example of a prize competition.
Conversely, a competition that asks for one simple question, where the answer is widely and commonly known or is blatantly obvious from the material accompanying the competition, would not be considered a prize competition based on skill.
Between these two examples there is not an obvious line that can be drawn. The 2009 Guidance articulates the test as “whether there is a reasonable expectation that the skill, judgment or knowledge requirement would either deter a significant proportion from entering or prevent a significant proportion from receiving a prize.” There are therefore two elements to this test;
Did the skill, judgment or knowledge requirement in fact eliminate a significant proportion from participation or success and;
If it did not, on what basis did the organizers conclude it was reasonable to expect that it would have done so?
While a “significant proportion” is not defined, it is given its plain and ordinary meaning. The 2009 Guidance specifies that organizers may be invited to demonstrate how they calculated a “significant proportion”, for example by carrying out research to test types of questions with viewer or reader panels to establish if a significant proportion would be deterred from entering, or would get the answer incorrect.
In SuperOner, users are required to answer a series of qualification questions in an initial qualification round correctly. While they are able to attempt the qualifying rounds as many times as desired, a significant proportion, 50%, of users will not clear the qualifying round at any given time. 50% would qualify as a significant proportion unless indicated otherwise by the Gambling Commission.
In addition, the SuperOne monitors the number of players who provide answers for questions at each level of the game, and that if the number of players that answer all questions correctly exceeds a certain threshold the system automatically raises the difficulty level of future questions at that level. This type of automated difficult-ensuring system would provide sufficient evidence that a significant proportion of users are eliminated from participation in the game.
At the same time, a significant proportion of users are eliminated from success, both because due to the challenge model only one winner can be selected, and because the games are designed at an anticipated 70% correct answer rate. Together with the challenge model and increasing level of difficulty, this design would ensure a significant proportion of users are eliminated from success.
In addition to the test in the 2009 Guidance, a number of additional indicators are also specified;
Where a competition uses a multiple answer format, whether there are sufficient plausible alternative answers;
“Joke” answers are only used where there are sufficient plausible alternatives;
The correct answer is not obviously given close to the question;
The number of questions asked;
The types of formats used, for example, complex logic or mathematical puzzles which are demonstrably not simple to complete;
The cost of entry and/or the value of the prize; for instance the level of skill or knowledge needed to deter potential participants from entering a competition with a high value prize is likely to be greater than in the case where the value of the prize is low.
As an example; a popular game like Who Wants to be a Millionaire, involving multiple choice questions based on skill and increasing difficulty, would ordinarily not be considered a game of chance, depending on the level of difficulty of the questions and the anticipated incorrect response rate from players.
Based on these indicators, the SuperOne games would be more likely to be considered a prize competition. There are sufficient plausible answers in the multiple choice questions, and they increase in difficulty. There are also a significant number of questions asked and the correct answer is not obvious, nor are joke answers offered as answer choices.
While prize competitions run by SuperOne do not meet the definition of gaming, the 2009 Guidance clarifies that other rules and regulations may be applicable to SuperOne, such as unfair trading regulations and consumer protections laws.
Betting Regulations
The definition of “betting” is set out in Section 9 of the Act as making or accepting a bet on;
The outcome of a race, competition, or other event or process, the likelihood of anything occurring or not occurring, or whether anything is or is not true.
A transaction that relates to the outcome of a race, competition or other event or process may be a bet within the meaning of subsection (1) despite the facts that;
The race, competition, event or process has already occurred or been completed, and one party to the transaction knows the outcome.
Section 11 of the Act gives further guidance on how activities which might fall within the scope of a prize competition could qualify as betting;
For the purposes of section 9(1) a person makes a bet (despite the fact that he does not deposit a stake in the normal way of betting) if he participates in an arrangement in the course of which participants are required to guess any of the matters specified in section 9(1)(a) to (c), he is required to pay to participate, and if his guess is accurate, or more accurate than other guesses, he is to win a prize, or enter a class among whom one or more prizes are to be allocated (whether or not wholly by chance).
In subsection (1) a reference to guessing includes a reference to predicting using skill or judgment.
An example of how Section 11 could apply to a prize competition is as follows; (1) users are required to pay money to participate in a competition; (2) the competition requires the users to guess who will win a race to be held the following weekend; (3) the prize is awarded to the user who correctly guesses the winner of the race. This would constitute betting.
It would also constitute betting if the question was who had won a particular race the previous weekend if the result of that race was only known to the competition organizer and therefore the answer could only be guessed and could not be known through skill or knowledge.
The questions that the players are required to answer to qualify for in the SuperOne games and when participating in the games do not require the users to guess at the outcome of a race, competition or other event, the likelihood of anything occurring or not occurring or whether anything is true or not true in so far as a guess and not skill or knowledge would inform the answer.
Therefore the SuperOne games do not constitute betting under the Act.
Lotteries Regulations
Section 14 of the Act identifies two types of lotteries, a “simple” lottery and a “complex” lottery. An arrangement is a simple lottery if it satisfies all of the following three conditions;
Persons are required to pay in order to participate in the arrangement;
In the course of the arrangement one or more prizes are allocated to one or more members of a class; and
The prizes are allocated by a process which relies wholly on chance.
The SuperOne games satisfy the first two limbs of this test as participants are required to pay a cash sum in order to play the games and, after the round of qualifying questions, the winner at each level of the games wins a monetary prize. It must therefore be determined whether those prizes are allocated by a process which is determined wholly on chance.
Section 14 of the Act sets out conditions on which a promotion which purports to require participants to display skill, judgment, or knowledge may still be deemed to rely wholly on chance. These are where the “skills” requirement cannot reasonably be expected to prevent;
A significant proportion of persons who participate in the promotion from receiving a prize; or
A significant proportion of persons who wish to participate in that promotion do so.
For the purposes of determining whether the SuperOne games constitute a simple lottery, it is not necessary to examine the skill element at the qualification stage. In order to receive a prize in round one and subsequent rounds, a player must defeat the nine other players in their virtual group, whether at the initial stage or following one or more head-to-head challenges. As only one prize is awarded for each round, the skill requirements serve to prevent a significant proportion of persons who participate in the promotion from receiving a prize.
The SuperOne games therefore clearly do not constitute a simple lottery.
An arrangement is a complex lottery under the Act if it satisfies all of the following four conditions;
Persons are required to pay in order to participate in the arrangement;
In the course of the arrangement one or more prizes are allocated to one or more members of a class;
The prizes are allocated by a series of processes, and
The first of those processes relies wholly on chance.
The first two limbs of this test are the same as for a simple lottery and, as with the simple lottery, the SuperOne games satisfy these limbs.
The key difference between a simple lottery and a complex lottery is that in a complex lottery the prizes are allocated by a series of processes, and the first of those processes relies wholly on chance.
It is clear that the SuperOne games comprise a series of processes. As a minimum, the qualifying questions and round one, but also the head-to-head challenges and subsequent rounds would create processes. It is therefore necessary to determine whether the first of those processes, the qualifying questions, relies wholly on chance.
In order not to be deemed to be determined wholly on chance, the qualifying questions must be of sufficient difficulty that a significant proportion of persons who attempt the questions will not answer all of them correctly. The Act does not provide a definition as to what classifies as a “significant proportion” but the Gambling Commission, in the 2009 Guidance, has given indication that this expression must be given its normal ordinary meaning.
The SuperOne system monitors game difficulty and raises it accordingly to keep the success rate of answering questions at maximum around 70%, meaning that a minimum of 30% will fail. As stated above, 30% of users would qualify as a significant proportion. The SuperOne games do not therefore rely wholly on chance, and are instead prize competitions where users use their skill and knowledge to compete and win prizes.
In line with the Gambling Commission’s guidance, SuperOne should keep detailed records of the difficulty levels at which the questions in the SuperOne games are set, so that SuperOne can reasonably demonstrate why it expected the applicable percentage of participants to fail to answer the requalification questions correctly.
Play for Free Games
The “Play for Free” versions of the SuperOne games do not constitute gambling under English law, as there is no payment to enter and there is no prize offered for success.
Compliance in the UK
SuperOne games are clearly defined as prize competitions under the UK Gambling laws, and could freely operate across the nation. No license is required under the Act to conduct or facilitate a prize competition.
In conclusion, SuperOne can - without any licensing - offer its games to more than 65 million Britons in one of Europe’s largest and most sought after commercial markets for sports, entertainment and advertising.
EU Skill Game Regulations
In the European Union member states may enjoy their freedom to regulate gambling and gaming as they see fit, it is unquestionable that this must be embedded in and done with respect for the larger framework of Europe. That does not impose some restrictions on the member states' autonomy.
The most important is to follow from the supremacy of the European Internal Market Freedoms. While gambling is explicitly excluded from the scope of application of the Directive on Electronic Commerce, the Services Directive, and the Audio-visual Media Services Directive, some impact may follow from other Directives such as the Notification Directive, the Third Money Laundering Directive, and the VAT package.
The regulation of skill games varies widely amongst the member states, but, in general, most of the jurisdictions have regulations similar to those of the United Kingdom. However, there are a few notable exceptions like Belgium, Italy, Norway and Spain.
Legal Assessment of Tokens
Introduction of Super Tokens
SuperOne intends to issue a number of tokens (“SuperOne tokens”) to affiliates (“Affiliates”) of the SuperOne platform (“SuperOne token holders”) in return for cryptocurrency, traditional currency, and/or other crypto assets. SuperOne tokens may be made available for trading on secondary exchanges. SuperOne tokens are available for purchase from SuperOne for an indefinite period. SuperOne token holders are intended to be SuperOne Affiliates who purchase Super tokens to participate as affiliates on the SuperOne platform.
SuperOne tokens will be issued via a blockchain specifically created for the SuperOne tokens, or directly connected to such via interoperable and/or directly pegged intermediaries, which uses a proof-of-stake validation process to validate transactions (the “SuperOne Blockchain”). In accordance with the proof-of-stake model, owners of SuperOne tokens can stake their tokens to attest, or validate, blockchain blocks into existence (the “Validators”) and thereby facilitate transactions on the SuperOne Blockchain. Validators participate in the SuperOne Blockchain network by contributing their staked tokens to nodes. Validators contribute to the SuperOne Blockchain network by attesting to a block proposed by the Master Validator Nodes. These blocks correspond to transactions made on the SuperOne Blockchain network. Validators then receive rewards for these activities. By attesting to blocks, Validators facilitate the transactions made on the SuperOne Blockchain.
Depending on the complexity of the transaction, the SuperOne Blockchain is designed to classify transactions in different tiers of complexity and, therefore, in different levels of rewards received from validating transactions depending on the different tiers. As ultimately, more complex games require more complex transactions, Validators facilitating transactions for these games will incur greater rewards, as the validation required for these games is more complex.
SuperOne token holders will be able to stake Super tokens through the validation process and receive corresponding staking rewards in proportion to the number of staked Super tokens (the “Staking Rewards”). SuperOne token holders may contribute their Super token to Validator Nodes and earn rewards from being Validators on the SuperOne Blockchain. SuperOne token holders are able to connect their Super tokens to Validator Nodes and participate in staking, allowing the SuperOne token holders to participate in staking without surrendering ownership and control of their Super tokens. In exchange for validating transactions on the SuperOne Blockchain, SuperOne token holders will earn Staking Rewards.
SuperOne Staking may be in soft lockup (no minimum duration for staking) or hard lockup (minimum period for staking tokens) as defined by SuperOne. Minimum amounts of Super tokens contributed to staking will be set by the SuperOne Blockchain and may change over time, depending on the needs of the SuperOne Blockchain network. SuperOne Affiliates will be eligible for Staking Rewards from staked Super tokens. SuperOne Affiliates will also be able to earn commission from customers and transactions driven to the SuperOne Platform.
As part of the SuperOne Blockchain facilitation, SuperOne may also choose to offer a redemption or buy-back program for Super tokens, in the event that the SuperOne tokens sold and not staked create the situation where the SuperOne Blockchain is not validating transactions in time to keep up with the demands of the SuperOne Blockchain. Such redemption or buy-back would happen at a fixed-price determined at the time the redemption or buy-back program is announced and would be made to ensure the SuperOne Blockchain proof-of-stake model continues operating within normal parameters.
In the sections below we set out the legal framework for the SuperOne tokens and consider whether the SuperOne tokens would be considered a security under US, UK, and German law.
US Legal Framework
The Howey Test
The applicable securities regulations in the United States are prescribed in the United States Securities’ Act of 1933 and its implementing regulations (as amended, the “Securities Act”). As relevant to this analysis, the Securities Act defines a “security” as “any… investment contract” (15 U.S.C. Section 77b(a)(1)). The U.S. Securities and Exchange Commission (“SEC”) has expressed that those who offer and sell securities in the United States are required to comply with federal securities laws. The principle framework for determining whether a specific digital token may be considered a security under the Securities Act is the “Howey Test.” The Howey Test is often divided into four elements to determinate the existence of an investment contract, analyzing four elements: (i) whether there exists an investment of money; (ii) whether there exists a common enterprise; (iii) whether there exists an expectation of profits; and (iv) whether any expected profit is derived from the entrepreneurial or managerial efforts of other third parties. All four elements of the Howey Test must be met for an investment contract and therefore a security to exist.
This assessment is limited to the likelihood that the SuperOne token may be considered a security under the Securities Act and is not a full legal opinion. It does not include a comprehensive analysis of the United States’ federal or state laws, or international laws, rules, or regulations except as referenced herein. Such laws, rules, or regulations may apply to the SuperOne tokens. Additionally, this assessment does not address compliance with the Securities Exchange Act of 1934, the Commodities Exchange Act, banking laws, including but not limited to money laundering regulations, state securities laws, money transmitter laws, consumer protection or consumer product safety laws, or other laws, rules, or regulations. We also do not address whether SuperOne may be an investment company under the Investment Company Act or whether it must register a specific type of entity pursuant to any other federal or state securities law.
The Howey Test is composed of criteria enunciated for “investment contracts” by the U.S. Supreme Court in SEC v. W.J. Howey Co., 328 U.S. 293 (1946) and subsequent judicial and administrative decisions.
Application of Howey to Digital Tokens
The SEC has provided additional guidance when considering the applicability of the Howey Test to digital tokens, namely in the “DAO Report”, the “Munchee Order”, and has issued further guidance when analyzing digital tokens under the Howey Test (the “Digital Asset Framework Guidance”).
For further legal references, please see; SEC Exchange Act Rel. No. 81207, Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO (July 25, 2017) The “DAO Report”; in the Matter of Munchee Inc., Securities Act Rel. No 10455 (December 11, 2017) the “Munchee Order”; and also, the SEC Framework for “Investment Contract” Analysis of Digital Assets.
On July 25, 2017, the SEC released the DAO Report. The DAO Report described the SEC’s investigation of DAO, a virtual organization, and its use of blockchain technology to facilitate the offer and sale of DAO Tokens to raise capital for indeterminate projects. After considering the facts and circumstances of the initial offering and marketing of DAO Tokens, as well as the underlying technology, governance, and curation mechanism, the SEC determined that the sale of DAO Tokens constituted an unregistered sale of securities.
Following this enforcement action, on December 11, 2017, the SEC filed the Munchee Order, concluding that the Initial Coin Offering (“ICO”) of self-classified utility tokens issued by the sponsor of a restaurant review community application constituted an unregistered offering of securities. The SEC analyzed the MUN Token under the Howey Test and focused primarily on the test’s third element, a reasonable expectation of profits, and the fourth element, profits derived from the entrepreneurial and managerial efforts of others, construing each of those elements broadly to conclude that the MUN Token constituted an investment contract.
Relevant to this analysis is that fact that the Munchee Order found an expectation of profit by citing multiple public statements by the ICO sponsor and its agents promising significant returns for purchasers of MUN Tokens (The Munchee Order at para. 5 – 6), efforts by the ICO sponsor to facilitate secondary trading in MUN Tokens, and an increasingly valuable ecosystem wherein MUN Tokens could be used to buy and sell services.
For further legal references, please see; Id at para 8-9. More recently, a federal court in California echoed the emphasis in the Munchee Order on public statements by a token issuer. On February 14, 2019, the U.S. District Court for the Southern District of California, found that the tokens at issue were a security under the Howey Test, focusing on the economic realities of the transaction and specifically, the objective terms or promotional materials, information, economic inducements or oral representation at seminars. See SEC V. Blockvest LLC et all., case number 3:18-cv-02287.
The Munchee Order also noted that the MUN Tokens did not have utility since they had no use cases at the time, adding, however, that even “if the MUN Tokens had a practical use at the time of the offering, it would not preclude the token from being a security.” (Id at para. 9).
After these and other enforcement actions, the SEC issued the Digital Asset Framework Guidance to clarify its position on digital assets and further guide digital asset issuers. The SEC clarifies that while an investment of money and a common enterprise are usually found via the issuance and distribution of digital assets, a reasonable expectation of profits derived from the efforts may not always exist. Within this guidance is a series of questions and factors to evaluate the mechanics of the distribution of the digital asset, and ultimately is focused on whether the digital asset is more like an investment or more like a purchase made for consumer use. Further elaboration on the Digital Asset Framework Guidance and its applicability to the Super tokens can be found below.
The SEC has also issued no-action relief to a select few digital asset issuers, the key characteristic of these digital assets being a closed-loop system preventing the external transfers of the digital assets, and the digital assets being pegged to a fixed price. For example, see SEC Response of the Division of Corporate Finance Re: TurnKey Jet, Inc. 3 April 2019.
Analysis of the SuperOne Tokens Under the Howey Test
Overall, SuperOne can make reasonable arguments that the SuperOne tokens do not meet all four requirements of the Howey Test. As discussed below, the primary purpose for purchasing and using SuperOne tokens are for consumptive use on the SuperOne Platform. Further, any Staking Rewards received for staking SuperOne tokens are derived from the performance of a service in exchange for remuneration for providing that service, rather than for any profit proceeds received from an investment contract.
Investment of Money
The first element of the Howey Test is likely met because SuperOne members purchase SuperOne tokens with fiat currency or digital assets, which constitutes an investment of money.
Common Enterprise
Courts apply two different tests to determine whether the element of a common enterprise is met. SuperOne can make reasonable arguments that the SuperOne tokens do not meet this requirement.
Horizontal Commonality: According to this test, a common enterprise exists if multiple investors pool assets and share in the profits and risks (Revank v. SEC Realty Corp.,18 .3d 81, 87 (2d Cir. 1994). SuperOne token holders may join with other SuperOne token holders to stake their tokens. In such an instance there may appear to be a pooling of assets. In operation, however, the assets are not pooled in the sense of sharing both profits and risks. Profits are not shared by validators in a pooled Validator Node; profits are derived from the exact allocation of SuperOne tokens staked from each individual SuperOne token holder joining the Validator Node. Likewise, risks are not shared. When adding SuperOne tokens to a pooled Validator Node, the SuperOne token holder never gives up ultimate control of their SuperOne tokens. By integrating their digital wallet with the Validator Node, the SuperOne token holder connects their SuperOne tokens to the Validator Node, rather than sending and thereby giving up control of their SuperOne tokens into a pooled account. The SuperOne token holder can disconnect their SuperOne tokens from the Validator Node at any time. In addition, because of the smart contract technology connecting the SuperOne token holder’s wallet to the Validator Node, no change or action by the Validator Node can change the system parameters of the staking feature, in practice meaning the Validator Node has no control over the SuperOne token holder’s SuperOne tokens.
Vertical Commonality: The vertical commonality test turns on whether SuperOne token holder’s fortunes are bound up with the actual fortune of the promoter or issuer of the security. Vertical commonality can exist even when the fortunes of investors do not rise and fall together or even where there is no pro rata sharing of profits and losses. SuperOne token holders purchase SuperOne tokens for consumptive use on the SuperOne Platform. They may also stake SuperOne token to facilitate the validation process on the SuperOne Blockchain network. Because both the consumptive use of SuperOne tokens and the staking use of SuperOne tokens rests solely on the continued existence of the SuperOne Blockchain, vertical commonality may exist.
Ultimately, whether horizontal or commonality exists, SuperOne token holders are relying on SuperOne to deliver certain services and facilitate the SuperOne Blockchain, rather than delivering a capital return or other profit on an anticipated price increase of the SuperOne tokens.
Expectation of Profits
The Supreme Court noted that under the Howey Test, “profits'' should be construed as “capital appreciation resulting from the development of the initial investment… or participation in earning from the use of investors’ funds…” (United Housing Federation v. Forman, 421 U.S. at 825 – 53). Another consideration is whether SuperOne token holders are relying on the efforts of others, particularly managerial as opposed to ministerial efforts.
SuperOne token holders do not have a reasonable expectation of profit derived from an investment product. SuperOne tokens are used to participate in the affiliate program on the SuperOne Platform. SuperOne token holders may wish to stake their SuperOne tokens to facilitate the validation process of the SuperOne Platform, which is a proof-of-stake blockchain requiring staking to operate the SuperOne Blockchain. It is anticipated that SuperOne Affiliates, who may initially purchase large quantities of SuperOne tokens, may wish to stake SuperOne tokens and earn Staking Rewards for their validation services. In this sense, SuperOne Affiliates are earning remuneration purely from the services they provide, namely their staking services, from which they derive Staking Rewards. SuperOne Affiliates are not deriving any profit from an investment contract.
The mechanics of the SuperOne token are inherently designed to facilitate the proof-of-stake SuperOne Blockchain, rather than designed as an investment whereby SuperOne token holders can anticipate an expectation of profits from any rise in the SuperOne token value. SuperOne token holders may earn Staking Rewards by facilitating the SuperOne Blockchain proof-of-stake mechanism via validation of transactions. This also discourages trading of SuperOne tokens on a secondary market, but SuperOne token holders can use the secondary market to sell their tokens when they no longer wish to participate in the affiliate or staking program. As ultimately SuperOne is making SuperOne tokens available for purchase, it is not anticipated, based on fundamental economics, that a SuperOne token holder would be able to find a buyer on a secondary market that would purchase SuperOne tokens at a higher price than what SuperOne is currently offering via token sales on the SuperOne Platform. SuperOne has also locked the tokens for transfers during the token. Likewise, any redemption or buy-back made to facilitate the proof-of-stake SuperOne Blockchain would not create an expectation of profit as, ultimately, SuperOne would announce a fixed-price buyback to facilitate the SuperOne Blockchain.
Further analysis of the Digital Asset Framework Guidance clarifies that the SuperOne token does not carry a reasonable expectation of profit. The SuperOne tokens “do not give the holder rights to share in the enterprise’s income or profits or to realize gain from capital appreciation of the digital asset” (SEC Digital Asset Framework Guidance.), nor does it grant the holder rights to dividends or distributions. Importantly, the Staking Rewards are derived from the validation process and the services of maintaining the SuperOne Blockchain. SuperOne token holders do not reasonably “expect that an [Active Participant’s] efforts will result in a capital appreciation of the digital asset and therefore be able to earn a return on their purchase.” The SuperOne tokens are targeted in the first instance toward SuperOne Affiliates and “expected users of the goods or services or those who have a need for the functionality of the network”, rather than “broadly to potential purchasers”. While the SuperOne tokens may be traded on a secondary market, any expectation of profit from those trading activities would be ancillary to the purpose of the SuperOne tokens, which is to facilitate the affiliate program and to validate transactions on the SuperOne Blockchain. SuperOne Affiliates are also encouraged to use tokens to facilitate the proof-of-stake SuperOne Blockchain, rather than trade the tokens on a secondary market. From these and other factors, it is indicative to SuperOne that the SuperOne tokens would not meet the element of the expectation of profits within the Howey Test.
Profits from Entrepreneurial or Managerial Efforts of Others
The final factor of the Howey Test asks whether any profit that comes from the investment is largely or wholly outside of the investor’s control. If so, the investment might be a security. If, however, the investors’ own actions largely dictate whether an investment will be profitable, then that investment is probably not a security.
Any remuneration gained from the SuperOne tokens is derived from provision of services, rather than the entrepreneurial or managerial efforts of SuperOne or others. SuperOne token Holders may receive remuneration in the form of Staking Rewards via staking their SuperOne tokens, but those Staking Rewards are received in exchange for staking services provided. Those staking services facilitate the validation process of the proof-of-stake SuperOne Blockchain and are completely within the SuperOne token holders’ control. SuperOne Affiliates may also participate in an affiliate program with SuperOne, thereby driving users to the SuperOne Platform in exchange for a commission, but that remuneration is plainly not an investment contract and is derived from the provision of services. For these reasons, any profits gained from the use of the SuperOne tokens are largely and decisively in the SuperOne token holders’ control.
A digital asset must meet all four elements of the Howey Test to be characterized as a security. SuperOne has identified reasonable arguments as to why the SuperOne token might fail one or more of those elements.
Conclusion
SuperOne tokens do not constitute a security under applicable US regulations as the token functions as a utility token which grants access to the SuperOne Affiliate functions and is therefore used for commercial purposes rather than investment purposes. SuperOne Affiliates may earn commissions from services they perform, rather than any appreciation in the SuperOne token. Further, the Staking Rewards they receive originate from contributing SuperOne tokens to the staking feature and facilitate the transactions made on the SuperOne Blockchain via the validation process. Such staking, which pays out Staking Rewards in exchange for validating transactions via the Proof of Stake method, constitutes a fee received for a service, rather than a gain received from an investment.
UK Legal Framework
Type of Tokens
The UK regulatory regime covers certain activities relating to “specified investments”. These specified investments include shares, deposits, and contracts for insurance. The regulatory regime is technology neutral. That is, it does not consider the technology used to determine whether a product is a specified investment but rather considers the underlying investment. Therefore, cryptoassets in themselves will not be considered a specified investment without meeting the requirements of a security. The UK securities regulator, the Financial Conduct Authority (“FCA”), has acknowledged three categories of crypto assets (FCA, ‘Cryptoassets: our work’, First Published: 23 January 2019, Last Updated: 25 October 2019);
Payment Tokens or Exchange Tokens
Tokens are used as a means of exchange or for an investment. These tokens are usually decentralized and designed to be used primarily as a medium of exchange. They do not provide the types of rights or access as provided by security or utility tokens. Bitcoin and Litecoin are specified by the FCA as examples of these types of tokens. Payment Tokens are not regulated by the FCA.
Utility Tokens
Tokens that are not a security token or e-money token, and which can be redeemed for access to a specific product or service that is typically being provided using a Distributed Ledger Technology (“DLT”) platform. Utility Tokens are not regulated by the FCA.
Security Tokens
Tokens that amount to a ‘specified investment’ under the Regulated Activities Order (“RAO”), excluding e-money. These tokens may provide rights such as ownership, repayment of a specific sum of money, or entitlement to a share in future profits. They may also be transferable securities or other financial instruments under the EU’s Markets in Financial Instruments Directive II (“MiFID II”). Security Tokens are regulated by the FCA. In addition to Security Tokens, we have E-money tokens, which meet the definition of e-money under the Electronic Money Regulations, and are regulated by the FCA.
Generally, Payment Tokens and Utility Tokens are not regulated by the FCA, while Security Tokens and E-money Tokens are regulated by the FCA. In practice, some Utility Tokens are promoted as Security Tokens, even if the Security Tokens do not grant the token holder equity or debt rights. Some issuers of these tokens may believe there is a limited market for Utility Tokens and prefer to promote their tokens as Security Tokens in order to attract purchasers or investors to their token. To the extent a Utility Token is promoted as a Security Token, the promotion requirements for securities will apply to these tokens, even though the tokens themselves are not in actuality Security Tokens. It is also indicated, albeit not clear, that the MiFID regime would apply to Utility Tokens promoted as Security Tokens, and therefore trades in relation to these tokens may be regulated or required to be done on a recognized exchange, multilateral trading facility (“MTF”) or organized trading facility (“OTF”).
Upon reviewing the proposed mechanics and use of the SuperOne tokens, the argument can be made and the conclusion can be drawn that within the framework published by the FCA, the SuperOne tokens would be classified as a Utility Token and do not meet the classification of a Security Token for the following reasons;
The SuperOne tokens represent no ownership rights in SuperOne and in the event of a sale of SuperOne, SuperOne token holders will have no involvement or rights in the sale of SuperOne;
SuperOne token holders have no right to regular payments that would qualify the SuperOne tokens as a “specified investment” or indicate any type of security, such as dividend payments or profit-sharing payments;
On the winding up of SuperOne, there will be no rights for SuperOne token holders to a proportion of the proceeds;
The value of the SuperOne tokens to each SuperOne token holder will be determined by their use of the SuperOne Platform and their staking activities. SuperOne tokens may be traded on a secondary market, but any value derived from such activities would be ancillary to actual use of SuperOne tokens within the SuperOne Platform;
The purpose for the SuperOne token is for affiliate access and use on the SuperOne Platform, rather than for investment;
SuperOne does not owe a debt or repayment obligation to the SuperOne token holders and SuperOne has no obligation to pay any dividends, distributions, or interest;
If SuperOne were to list its shares on a recognized exchange, the SuperOne token holders would have no rights or involvement in the listing process, nor be able to trade the SuperOne tokens on a recognized exchange (unless the SuperOne tokens are separately listed, which they are);
There are no voting rights given to SuperOne token holders in relation to future issuances of SuperOne tokens, SuperOne operations, or the SuperOne Platform; and;
The SuperOne tokens do not grant the SuperOne token holders any rights in relation to future issuance of shares or debentures by SuperOne, nor do they provide the SuperOne token holders with an option to acquire securities.
As the FCA has stated in its guidance on crypto assets, the ability for a token to be tradable on secondary markets and used for speculative investment purposes in and of itself does not classify a token as a Security Token.
In light of the factors above, SuperOne does not consider the SuperOne token to be classified as a Security Token, a security, or a ‘specified investment’ under applicable UK regulations.
Collective Investment Scheme
Units in a collective investment scheme are a specified investment and therefore will be subject to the applicable regulatory regime. The Financial Services and Markets Act 2000 (“FSMA”) definition of ‘collective investment scheme’ is very broad.
Collective investment scheme means any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income.
The arrangements must be such that the persons who are to participate (“participants”) do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions. The arrangements must also have either or both of the following characteristics; the contributions of the participants and the profits or income out of which payments are to be made to them are pooled; or the property is managed as a whole by or on behalf of the operator of the scheme (The United Kingdom Financial Services and Markets Act 2000 Section 235).
While the contributions of the participants in this case will be pooled together by SuperOne for its use and the SuperOne Platform is managed by SuperOne and not the SuperOne token holders, the SuperOne token holders will not receive any income or profits, nor any payments from SuperOne’s profits or income. In addition, while SuperOne token holders may connect their SuperOne tokens to Validator Nodes to facilitate the SuperOne Blockchain, they are not pooling their SuperOne tokens by giving up control over their SuperOne tokens and may disconnect their SuperOne tokens from Validator Nodes at any time. As such, the issuance of the SuperOne tokens will not meet the definition of a collective investment scheme.
European Union
Where crypto assets fall within the current regulatory parameter, any EU regulations or directors governing that area will be applicable. It is noted that there is currently no harmonized EU-wide approach in relation to crypto asset regulation, but a draft framework has been announced and is discussed in more detail below. Because of the current lack of an EU-wide approach, some jurisdictions have produced their own domestic requirements and regulations. Such jurisdictions include France, Germany, Malta, and Gibraltar, which may require a more careful analysis.
MiFID
MiFID requires EU jurisdictions to regulate certain activities, including reception and transmission of orders, portfolio management and dealing on own account, in relation to financial instruments. These financial instruments include transferable securities, options, futures, swaps, and units in collective investment undertakings, among others.
Transferable securities and units in a collective investment undertaking are the two instruments which are potentially applicable to the SuperOne tokens. Transferable securities are defined as “classes of securities which are negotiable on the capital market” (EU Directive (2014/65/EU) Article 4(1)(44)). Negotiable on the capital market does not require listing, but rather includes securities which are capable of being traded on the capital market, including shares, bonds, and warrants. Given that the SuperOne token is not considered to be a security, it will not meet the definition of a transferable security. However, were the SuperOne token to be considered to be a security, it is likely the MiFID regime would apply.
The SuperOne token also does not meet the definition of a unit in a collective investment undertaken, as the issuance does not meet the definition of a collective investment undertaking. The analysis of this is set out in the alternative investment fund section below.
As the SuperOne tokens do not meet the definition of a financial instrument under MiFID, the MiFID regime would not apply to the SuperOne tokens. However, particular EU jurisdictions may have additional local regulations which are applicable to the SuperOne tokens.
Alternative Investment Fund
In addition to the collective investment scheme, the SuperOne tokens may also be considered under the alternative investment fund (“AIF”) European Directive 2011/61/EU (“AIFMD”), applicable throughout the EU. The definition of an AIF is similar, although not identical, to that of a collective investment scheme. Under the AIFMD, AIFs are defined as “collective investment undertakings, including investment compartments thereof, which: raise capital from a number of investors, with a view of investing it in accordance with a defined investment policy for the benefit of those investors; and do not require authorization pursuant to Article 5 of Directive 2009/65/EC, the “UCITS Directive” (AIFMD Article 4(1)(a)).
Guidance from the European Securities and Markets Authorities (“EMSA”) states that a collective investment undertaking must have the following characteristics; the undertaking does not have a general commercial or industrial purpose; the undertaking pools together capital raised from its investors for the purpose of investment with a view to generating a pooled return for those investors; and the unitholders or shareholders of the undertaking – as a collective group – have no day-to-day discretion or control. The fact that one or more but not all of the aforementioned unitholders or shareholders are granted day-to-day discretion or control should not be taken to show that the undertaking is not a collective investment undertaking (European Securities and Markets Authority, Guidelines on key concepts of the AIFMD., ESMA/2013/611, 13 August 2013, Pg 3).
As with the collective investment scheme, the issuance of the SuperOne tokens will not be considered an AIF or a collective investment undertaking as the SuperOne token holders will not be investing in or receiving a pooled return. SuperOne token holders may stake their tokens and receive Staking Rewards only for facilitating the SuperOne Blockchain. SuperOne token holders connecting their SuperOne tokens to Validator Nodes will retain complete control over their SuperOne tokens and can disconnect their SuperOne tokens from the Validator Nodes at any time.
EU Prospectus Directive
Where securities are offered to the public or admitted to trading, a prospect meeting the requirements set out in the Prospectus Directive may be required. This prospectus would need to be approved by a regulator in the EU, which would not include the FCA (after the end of the Brexit transitional period on January 1, 2021). Once the prospectus is approved, the prospectus can be used throughout the EU.
To the extent the SuperOne token is a security or is marketed as such, a prospectus would be required unless one of the following exemptions applied; the offer is made to or directed at qualified investors only; the offer is made to or directed at fewer than 150 persons, other than qualified investors, per EEA member-state; the minimum consideration which may be paid by any person for transferable securities acquired by him pursuant to the offer is at least €100,000 (or an equivalent amount); the transferable securities being offered are denominated in amounts of at least €100,000 (or equivalent amounts); or the total consideration for the securities does not exceed €1,000,000 throughout the EEA. There is discretion within each EEA jurisdiction to increase the total consideration in (e) above, up to a maximum of €8,000,000.
It should be noted that even where an exemption from the Prospectus Directive requirements is available, any financial promotions may still require approval or specific content inclusions. These will be jurisdiction-dependent.
The only securities to which the Prospectus Directive applies are transferable securities, as defined in MiFID. As mentioned above, if SuperOne does not intend to market the SuperOne tokens as a Security Token, the SuperOne token would not meet the definition of a transferable security and as such there would be no prospectus requirements.
Anti-Money Laundering
While it has always been illegal to use any asset, including crypto assets, for illicit activity or money laundering, the anti-money laundering regime has generally excluded crypto assets from the registration, client due diligence and reporting requirements. However, the fifth anti-money laundering directive (“5AMLD”), which required implementation by EU member states by January 10, 2020, brought into scope crypto asset custodian and fiat-crypto exchanges. This requirement was brought into force in the UK by the FCA’s Cryptoasset Regime, which requires registration by crypto asset custodians and fiat-crypto exchanges, the “Cryptoasset Regime” (FCA, Cryptoassets: AML/CTF Regime, first published 25 October 2019, last updated 24 August 2020).
The Cryptoasset Regime is not directly applicable to issuers of crypto assets, unless the issuer is also providing custodian services. As SuperOne is not contemplated to provide custodian services and SuperOne token holders can hold SuperOne tokens within their own external wallets, SuperOne would not be considered a crypto asset custodian or a fiat-crypto exchange and would therefore not be subject to the Cryptoasset Regime.
Future Developments
One future development may affect the findings in this memorandum, namely the EU-Wide Cryptoasset Framework published by the European Commission on September 24, 2020 in its Digital finance package (the “EU Cryptoasset Framework''). This Cryptoasset Framework proposes to regulate crypto assets in the EU on a supranational level and focuses on making such a framework more digital-friendly and safe for consumers. From an initial review of the draft, the proposed EU Crypto Asset Framework would seem to treat Utility Tokens the same as current regulation, perhaps in future prescribing more stringent rules on marketing and advertising of Utility Tokens. It may also prescribe certain legal requirements, such as requiring any issuer of crypto assets to be located in the EEA. As the EU Cryptoasset Framework is not expected to be published into law within the next two years and will likely see significant changes before its implementation, this memorandum does not consider the specifics of the proposed law at this time.
Conclusion
SuperOne tokens are not considered to be a security under applicable UK laws, as there are no ownership rights in relation to SuperOne. The SuperOne token holders have no rights to, nor share in any profits, revenues, or distributions by SuperOne. As such, the creation of, promotion of or dealing in SuperOne tokens in the UK is not currently subject to the UK regulatory regime. On the basis that the SuperOne tokens are not security tokens in the UK, the SuperOne tokens would not be transferable securities under the European Directive 2003/71/EC (“Prospectus Directive'') or the EU Directive 2014/65/EU on Markets in Financial Instruments (“MiFID”) and therefore the Prospectus Directive and MiFID requirements are not applicable to the issuance of SuperOne tokens. The SuperOne token sale would also not be considered a collective investment scheme or alternate investment fund (“AIF'') under the UK or EU rules as there is no receipt of pooled funds. Furthermore, utility token crypto assets are not regulated directly by the Financial Conduct Authority.
German Legal Framework
Introduction
The regulatory requirements to be compliant with in Germany depend on whether the SuperOne tokens are qualified as securities, investments under VermAnIG, investments in collective schemes/AIFs or other financial instruments as defined in Sec. 1 para. 11 KWG as well as on respective steps to be performed with regard to the SuperOne tokens. Therefore, the description of the legal framework is followed by the qualification of the SuperOne tokens. Using the qualification of the SuperOne tokens as the basis, the issuance of the SuperOne tokens, their promotion and potential post issuance trading will need to be treated separately.
Qualification of the SuperOne Tokens
Some regulators in Europe, such as the FCA, have acknowledged three general categories of crypto assets or tokens; Payment Tokens used a means of payment and/or loyalty schemes; Utility Tokens which are a means to use a system or platform; and Security Tokens representing shares, debentures or units in a fund.
BaFin, however, is not considering these general categories of crypto assets in its supervisory practice of crypto assets and is also not using the classification to qualify the regulatory treatment of the respective products. Rather, BaFin is analyzing on a case by case basis, whether the offered crypto asset is fulfilling the prerequisites of applicable regulatory laws (BaFin’s Advisory Letter on the Classification of Tokens as Financial Instruments., WA 11-QB 4100-2017/0010, 28 March 2018).
Based on this practice, even utility tokens may qualify as financial instruments or securities if rights attached to them fulfill respective regulatory criteria. Taking this as background, in Germany the issuance of the SuperOne tokens as described above would need to be considered against the following categories;
Issuance of securities as defined under respective laws implementing the Prospectus Directive, i.e. the German Securities Prospectus Act (Wertpapierprospektgesetz or “WpPG”), Sec. 2. No. 1 WpPG;
Securities under respective laws implementing MiFID II, i.e. the German Securities Trading Act (Wertpapierhandelsgesetz or “WpHG”), Sec. 2. para. 1 WpHG in connection with Art. 4 para. 1 no. 44 MiFID II;
Issuance of capital investments pursuant to VermAnIG by qualifying as “non securities” capital investments (Vermögensanlang – “VermAnl Assets”);
Financial instruments under the German Banking Act (Kreditwesengesetz – “KWG”);
In addition, it may also qualify as an AIF, i.e. a collective investment undertaking pursuant to the AIFMD implementing KAGB.
Qualification as Securities
Where securities are offered to the public or admitted to trading, a prospectus meeting the requirements set out in the Prospectus Directive and WpPG may be required. This prospectus would need to be approved by a regulator in the EU, e.g. by BaFin in Germany. Once the prospectus is approved, the prospectus can be used throughout the EU.
For the purposes of the WpPG, the shares of common or preferred stock of a stock corporation or bonds, but also all other transferable securities, are regarded as securities. To this regard instruments which are securitized in a certificate are regarded as transferable securities whether they are listed or traded or not, but also electronic depository interests may qualify as transferable securities. Even transfer restrictions do not hinder this categorization.
Upon reviewing the information provided on the SuperOne tokens, it appears that the SuperOne tokens would not be considered as securities under the WpPG for the following reasons, despite being principally transferable;
The SuperOne tokens represent no ownership rights in SuperOne and in the event of a sale of SuperOne, SuperOne token holders will have no involvement or rights in the sale of SuperOne;
SuperOne token holders have no right to regular payments that would qualify the SuperOne tokens as a “specified investment” or indicate any type of security, such as dividend payments or profit-sharing payments;
There will be no rights for SuperOne token holders to a proportion of the proceeds on the winding up of SuperOne;
The value of the SuperOne tokens will be determined by their use of the SuperOne platform and their staking activities. SuperOne tokens may be traded on a secondary market, but any value derived from such activities would be ancillary to actual use of SuperOne tokens within the SuperOne Platform;
The purpose for the SuperOne token is for affiliate access and use on the SuperOne Platform, rather than for investment;
SuperOne does not owe a debt or repayment obligation to the SuperOne token holders and SuperOne has no obligation to pay any dividends, distributions, or interest;
The SuperOne token holders would have no rights or involvement in a listing of SuperOne shares on a recognized exchange, nor be able to trade the SuperOne tokens on a recognized exchange (unless the SuperOne tokens are separately listed, which they are);
There are no voting rights given to SuperOne token holders in relation to future issuances of SuperOne tokens, SuperOne operations, or the SuperOne Platform; and;
The SuperOne tokens do not grant the SuperOne token holders any rights in relation to future issuance of shares or debentures by SuperOne, nor do they provide the SuperOne token holders with an option to acquire securities;
Despite the fact that the definition of securities under MiFID II/WpHG varies from the definition in the WpPG in some nuances, based on the above arguments, the SuperOne tokens shall not qualify as securities under the MiFID II/WpHG as well.
Finally, the following rather minor risk shall be highlighted: some authors in German legal literature following the usage of the Howey test by the SEC are of the opinion that to qualify a Utility Token as a security is possible if the token is used by an average investor to generate profits on a secondary market, despite the fact that the prerequisites of being a security under EU/German law are not fulfilled. For example, the redemption/buy-back mechanism may be viewed as an indication that the SuperOne tokens are to be traded on a secondary market, as well as used on the SuperOne Platform. As indicated, however, the redemption/buy-back mechanism is meant to facilitate the SuperOne Blockchain and proof-of-stake mechanism as a means of control when not enough SuperOne Tokens are being staked to facilitate the validation process. In addition, the initial interpretation has no basis in the underlying laws and, hence, is rather contra legem. For example, commodities are also traded on secondary markets and also may be used for speculative investments, but obviously do not qualify as securities under European and German law. In addition, there are no indications that BaFin may follow such a minority opinion.
Qualification as VermAnl Assets
Since July 1, 2005, based on VermAnIG a prospectus must be prepared for non-securities investment assets, such as;
Shares that grant the investor participation in a company’s profits;
Shares in assets held or managed by the issuer or a third party on its own behalf for the account of a third party (trust assets);
Participation and subordinated loans;
Registered (non-transferable) bonds; and;
All other investment assets with an interest and/or repayment claim or any other cash-settled mechanism for the timely provision of funds, that are offered to the public in Germany and are not represented by securities within the meaning of the WpPG (cf. above), not being deposits (Einlagen) within the meaning of KWG.
The prospectus requirement is not applicable if the party offering these securities is already subject to a prospectus requirement under other regulations, an exemption is applicable, or a prospectus has not already been published pursuant to VermAnIG.
As described above, the SuperOne tokens are not shares or shares of similar instruments since they do not bear any rights for the SuperOne token holders which may be similar to rights shareholders normally receive. The SuperOne token holders can also not be qualified as participants, either via subordinated loan or registered bond, since they do not provide the SuperOne token holders with respective repayment claims for the invested capital, which is an essential part of a loan/loan-similar instrument such as a registered bond. Additionally, due to the same reasons, the SuperOne tokens are also not deposits within the meaning of KWG, which would require an unconditioned repayment claim of the SuperOne token holders against the issuer, which is not implemented.
Finally, there are sound and reasonable arguments to support the catch-all provision of Sec. 2 para. 1 no. 7 VermAnIg will not be applicable to the x SuperOne tokens. The SuperOne tokens are not intended to provide the SuperOne token holder with any interest/repayment claims and also the payments for the SuperOne tokens are not repayable after a period of time. And even though the SuperOne token holders may receive some economically valuable benefits – which could be qualified as a respective cash settled mechanism – the SuperOne tokens will be used to receive services and not cash interest/profit participation payments like in classical equity/debt investments. Nonetheless, because such benefits shall be provided to the SuperOne token holder, some minor risk remains that BaFin may qualify the SuperOne tokens as VermAnl Assets.
Qualification as AIF/Collective Scheme
The AIFMD implementing KAGB defines an AIF rather broadly as any pooling of investments or undertakings for collective investments under a common strategy. It distinguishes between public funds and so-called special AIFs, available as open-ended or closed-ended funds. Public funds are open to all kinds of investors, whereas only professional investors (within the meaning of the MiFID II) as well as semi-professional investors can invest in special AIFs.
The central aspect of KAGB is BaFin’s license requirement for all external or internal domestic investment managers (Kapitalverwaltungsgesselschaften – “KVGs”) (Sec. 20 KAGB). Domestically, external KVGs may only be set up in the legal form of a GmbH, an AG, or a GmbH & Co. KG. The use of an EU passport by foreign-based EU investment managers for activities in Germany is possible. Investment managers outside the EU need to be registered. In addition to the license requirement, investment managers will be subject to extensive duties and obligations, e.g. regarding internal procedures, conflicts of interests, transparency and observation of investment and debt limits. Outsourcing to third parties is permitted within certain boundaries; the outsourcing to non-licensed companies requires BaFin approval.
In this case, SuperOne token holders will not pool their funds. SuperOne token holders may connect their SuperOne tokens to Validator Nodes to participate in staking and enjoy the Staking Rewards, which is a service to contribute to the operation of the SuperOne Blockchain network. There is no defined common “investment” strategy to generate profits from any pooled funds. As mentioned above, SuperOne token holders will not receive any payments from SuperOne’s profits or income, but rather may only receive Staking Rewards for facilitating the SuperOne Blockchain network. Based on this, SuperOne tokens or the entity issuing SuperOne tokens shall not qualify as KVG and also not as AIF or a collective scheme under KAGB.
Qualification under KWG
KWG forms the legal basis for the operations and monitoring of credit institutions and financial services institutions in Germany. In this context the definition of financial instruments is broader than in other EU jurisdictions and as such in MIFID II/ WpHG.
In addition to all transferable securities, such as shares and bonds (Sec. 1 para. 11 sentence 1 no. 1 and 3 KWG), all fund units (Sec. 1. para. 11 sentence 1 no. 5) and all other investment products, such as loans, non-transferable shares, etc. (Sec. 1 para. 11 sentence 1 no. 2 and 4 KWG) also so-called calculation units (Sec. 1 para. 11 sentence 1 no. 7, 2. Alt. KWG) are regarded as financial instruments under KWG. As examples for calculation units, often the drawing rights from the IMF or the former ECU-units are named. However, BaFin in its administrative practice qualify as calculation units every instrument which is able to substitute official currencies even issued by private parties, especially payment tokens like BTC and ETH (Id at Section 4; BaFin’s circular regarding financial instruments pursuant to Sec. 1 para. 11 sentences 1 to 3 KWG., 20 December 2011, as amended on 26 July 2018, Section 2 b) gg)).
Despite this treatment, in recent case law a Higher Regional Court of Berlin (Kammergericht Berlin) disputed this view of BaFin with regard to BTC, arguing that with regard to BTC there is no issuer (Higher Regional Court of Berlin (Kammergericht Berlin), (4) 161 Ss 28/18 (35/18), NJW 2018, 3734 et seqq. 25 September 2018).
The recent case law does not seem to be applicable to the SuperOne tokens, since with SuperOne tokens there will be an issuer. Apart from that, the SuperOne tokens will not be used for payment of services and by this will not substitute traditional currencies. BaFin in its circulars explicitly and repetitively states that the “alternative currencies” are calculation units within the meaning of KWG 8 Id at Footnote 23). Nonetheless, a risk that BaFin will qualify SuperOne tokens as calculation units exists.
Qualification as Derivative Instruments
SuperOne tokens are not a derivative of another basis values (e.g. fiat currencies, securities or crypto assets as securities), but it's shall be mentioned that if the SuperOne tokens become a derivative of a basis of value, it also may be a derivative pursuant to Sec 2. para. 3 WpHF and by this a financial instrument pursuant to Sec. 2. Para. 4 no. 4 WpHG. Additionally, SuperOne tokens will qualify as respective financial instruments also pursuant to Sec. 1 para. 11 sentence 1 no. 9 in connection with Sec. 1 para. 11 sentence 3 KWG. This may lead to additional regulatory compliance requirements in dealing with respective financial instruments. However, as the SuperOne tokens are not presently a derivative, those requirements would not apply.
Issuance/Distribution of the SuperOne tokens in or into the German Market
As calculation units within the meaning of the KWG, neither the SuperOne tokens, nor SuperOne, will be subject to any regulatory requirements relating to the issuance of the SuperOne tokens. However, to the extent they were to be securities, or if SuperOne wished to offer separate securities, VermAnl Assets of AIF/ collective scheme units, the following would apply;
Prospectus Requirements, Exemptions, and Liability
Public Offer
If the SuperOne tokens are – against the arguments above – to be considered as securities or VermAnl Assets by the regulator, they will be subject to prospectus requirements if being offered to the public.
The term “offer” is not defined precisely and is understood differently with regard to the different types of financial instruments. Generally, the term is construed very broadly under German law. The WpPG defines the term “offer to the public'' (Sec. 2 no. 4 WpPG). According to the understanding of BaFin, public marketing activities, in principle, constitute public offers of securities/instruments. Even a combination of company information with a trading possibility (i.e. a securities number) may qualify as a public offer. Such an offer needs to address an unlimited circle of persons to be regarded as “public”. This is regularly the case with online platforms or access. Even an offer to existing shareholders of transferable securities (with pre-emptive rights) is regarded as a public offer. Also, the rendering of platform services may be regarded as support of an offer of third parties and, hence, be restricted. This is because it is not only the public offer itself that is subject to the relevant legal restrictions, but also the supporting of a public offer.
If the SuperOne tokens are regarded as VermAnIG Assets, the VermAnIG does not define the term “offer to the public''. However, the existence of the exemption in sec. 2 (1) no. 6 VermAnIG shows that even offers to a limited group of persons or employees by their employer/related companies would be (without this exemption) considered to be a public offer under the VermAnIG. BaFin considers the issuance of VermAnIG Assets to employees in principle to be a public offering of VermAnIG Assets. The offer may be done from abroad, if and to the extent the German market is targeted.
Targeting German Token Buyers
Notwithstanding that the issuance of SuperOne token shall target the German market, which is not subject to regulation, subsequent activities may fall within the regulatory regime and therefore consideration will need to be given as to whether these activities target the German market.
As mentioned, cross-border and/or online activities addressing the German market are understood as potential public offers of securities or VermAnl Assets in Germany. This is generally deemed to be the case if a foreign entity intentionally targets customers in Germany.
According to the notes which BaFin has issued regarding the licensing requirements for conducting cross-border banking business and/or providing cross-border financial services dated 5 April 2005, the “BaFin Notes” (BaFin, Notes Regarding the Licensing for Conducting Cross-Border Banking Business and/or Providing Cross-Border Financial Services., 5 April 2005), regulatory law is triggered if a foreign company/offeror intends to target the market in Germany for the purpose of repeatedly offering the transactions and/or the services on a commercial basis to companies and/or person that have their registered offices or ordinary residence in Germany.
The BaFin Notes describe various examples of such “targeting” of the German market. For example;
Targeted visits through employees or agents to potential clients in Germany (note there is no triggering point such as a certain number of days spent in Germany);
Potential clients in Germany are directly approached by the foreign entity by direct mail, fax or email for the purpose of offering banking and/or financial services;
Offers of banking and/or financial services products via a website if it is clear from the content of the website that these products target the German market (e.g. by use of German language, and/or specific Germany-related information).
If the online marketing of the offer did not contain German language or German language documents and the material was not sent to German recipients, it can be argued that an offer to the public was not performed in Germany. However, a respective disclaimer will be helpful and market standard.
Exemptions from Prospectus Requirements
According to the analysis above, the SuperOne tokens will not qualify as securities and therefore not be subject to the prospectus requirements. However, for completeness, the following exemptions from the prospectus obligations would be applicable if the SuperOne tokens would qualify as securities;
The offer is made to or directed at qualified investors only; The offer is made to or directed at fewer than 150 persons, other than qualified investors, per EAA member-state;
The minimum consideration which may be paid for any person for transferable securities acquired by him pursuant to the offer is at least EUR 100,000 (or an equivalent amount); or;
The transferable securities being offered are denominated in an amount of at least €100,000 (or equivalent amounts).
For offers with a total consideration which exceed €100,000 up to €8,000,000 within the EEA a simplified securities information document (Wertpaperinformationsblatt) of three DIN A4 pages is sufficient but must be filed with and approved by BaFin. Additionally, for offers equal or exceeding €1,000,000 respective securities can be distributed to retail investors only if distributed through KWG licensed investment advisors or brokers which shall control the following investment thresholds for private investors;
€1,000 without further requirements;
Up to max €10,000 if the retail investor has provided evidence that they hold net assets exceeding €100,000; or;
The average double net income of the retail investor is up to a maximum of €10,000.
Simplified exemptions would apply if the SuperOne tokens are regarded as VermAnIG Assets, especially if the total consideration is at least the equivalent of €200,000 per investor which is fulfilled with a €200,000 minimum investment requirement per investment, or a maximum of 20 units per investment for each separate offer. An exemption for qualified investors does not exist for VermAnIG Assets. Therefore, the minimum investment of €200,000 is necessary for non-tradable securities. Additionally, also within VermAnIG a simplified investment information document (Vermögensinformationblatt) is sufficient for financings below €2,500,000. However, if the offer is aimed at retail investors, distribution through KWG licensing investment advisors or brokers with the control of the thresholds above is a mandatory prerequisite.
Documentation Liability in General
Although an offer or granting of securities or VermAnIG Assets may fall under a prospectus exception, a person who has obtained documents in connection with the granting of securities or VermAnIG Assets may, in a strict sense, claim against the offeror or its affiliate(s) due to the general civil law prospectus liability (allgemeine zivilrechtliche Prospekthaftung im engeren Sinne) if a documentation similar to a prospectus is incorrect (unrichtig) or incomplete (unvollständig). For example, an information document explaining the mechanisms of the SuperOne tokens, such as a whitepaper, could be regarded as documentation similar to a prospectus and would constitute the basis for determining liability in potential disputes if it does not contain all material information required for an investment decision or if the information provided does not correspond to the facts. With respect to investment advisors, the general civil law prospectus liability, in a broad sense, (allgemeine zivilrechtliche Prospkethaftlung im weiteren Sinne) applies if incorrect or incomplete advice or information has been provided by a distributor.
Distribution under KAGB
Should, despite the arguments above, the SuperOne tokens be qualified as fund units pursuant to KAGG, a license from or notification to BaFin will be required. Different from other financial instruments, such as securities or VermAnl Assets, all kinds of offers or placements of fund units, all advertising or other sales activities, regardless of the type of number of investors, and including the private placement of special funds, are included in the definition of distribution pursuant to Sec. 293 KAGB, which requires a notification to BaFin with a waiting period of 20 business days. This means that any placement activity, even to professional investors or, after a sustainability test, semi-professional investors, requires the respective funds to be permitted for distribution in Germany.
If permitted for distribution, the placement may be restricted to professional or semi-professional investors. Semi-professional investors are such investors that have a certain investment experience, documented by a sustainability test, and invest at least €200,000 in the fund or which invest at least €10,000,000. All AIFs are considered financial instruments, both under WpHB and KWG.
Promotion of the SuperOne Tokens by Intermediaries
If SuperOne will use intermediaries to promote the SuperOne tokens, and the SuperOne tokens in any capacity qualify as calculation units, respective services by such intermediaries may be seen as investment advice (Anlageberatung) regarding financial instruments and the placing of financial instruments without a firm commitment basis (Platzierungsgeschäft) under KWG. Apart from that, the investment brokerage (Anlagevermittlung) will constitute a regulated activity if rendered in or into Germany. This leads to a license requirement under Sec. 32 KWG for such intermediaries only to the extent that fund units or VermAnl Assets are distributed to limited license requirements under the German Code of Trade and Commerce (Gewerbeordnung). As SuperOne tokens do not presently qualify as fund units or VermAnl Assets, these restrictions upon intermediaries do not apply.
Trading of the SuperOne Tokens
The organization of exchange/trading of the SuperOne tokens can be regarded as trading of financial instruments (as mentioned above the SuperOne tokens could be regarded as calculation units by BaFin as there is an issuer of such tokens) on a trading facility such as a MTF or OTF, depending on the facility organization. Hence, respective exchanges where the SuperOne tokens shall be traded, if they are traded, must have the required regulatory status and fulfill respective license requirements for OTF/MTF providers in Germany if the German market is targeted, even if such exchanges are located outside of Germany.
Regulatory Consequences
In case of non-compliance with any applicable requirements set out above;
BaFin may order the revision of the transactions performed;
Criminal/administrative proceedings may be initiated by the public prosecutor;
SuperOne token holders may claim for damages/losses based on regulatory violations;
Contravention with applicable regulatory requirements can also lead to the SuperOne token contract/terms and conditions being unenforceable against the SuperOne token holder.
Conclusion
SuperOne tokens are not considered to be a security and other capital investments within the meaning of the German Act on Capital Investments (Vermögen-sanlagengesetz – “VermAnIG”) or collective investment scheme or an alternative investment fund units, since (i) SuperOne tokens embody no ownership rights in relation to SuperOne and (ii) SuperOne token holders also have no rights to, nor share in any profits, revenues, or distributions by SuperOne. Based on its current regulator practice the Bundesanstalt für Finanzdienstleistungsaufsicht (“BaFin”) could potentially qualify the SuperOne tokens as calculations units (Rechnungseinheiten) under Sec. 1 para. 11 sentence 1 no. 7 KWG. Even though SuperOne tokens are to be qualified as calculation units under KWG, their issuance shall not be subject to further regulatory requirements (i.e. prospectus requirements or distribution allowances).
Indian Legal Framework
Legal Status of Virtual Currencies
In respect of virtual currencies, the Reserve Bank of India (“RBI”) had, through several press releases issued in the past (dated December 24, 2013 and February 1, 2017, amongst others) repeatedly highlighted the potential financial, operational, legal, customer protection and security related risks with such virtual currencies. However, these press releases were only advisory in nature and did not impose any specific regulatory restriction on transactions involving virtual currencies.
Subsequently, the RBI had, through its Statement on Developmental and Regulatory Policies released on April 5, 2018, issued policy measures with respect to ring-fencing regulated entities from the risks and concerns attached to virtual currencies. Pursuant to the policy announcement, the RBI issued a circular dated April 6, 2018 wherein it had mandated entities regulated by the RBI (such as, banks, financial intermediaries, etc.) to not deal with or provide services for facilitating any individual or business entities dealing with or settling virtual currencies, including Bitcoins (“Directive”). In this regard, the RBI even clarified that such services would include maintaining accounts, registering, trading, settling, clearing, opening accounts of exchanges dealing with them and transfer/receipt of money in accounts relating to purchase/sale of cryptocurrencies, amongst others. As such, this Directive severely restricted the conversion of virtual currency into fiat currencies and impaired the ability of businesses which dealt with virtual currencies to access financial services in India.
The Directive was challenged before the Supreme Court in the matter of Internet and Mobile Association of India vs. Reserve Bank of India (Writ Petition (Civil) No.528 of 2018) on various grounds, including the following;
It was contended that the RBI has no power to prohibit the activity of trading in virtual currencies since, inter alia;
Virtual currencies are not money or any legal tender (and rather goods/commodities) and accordingly, not within the purview of regulation by the RBI; and
The services rendered by virtual currency exchanges do not qualify as ‘payment system’ under the Payment Settlement and Systems Act, 2007, and as such, are not regulated by the RBI.
The manner in which the RBI exercised its power with respect to the ban (through the Directive) did not satisfy certain settled principles of law, wherein it was submitted that there was no satisfaction or application of mind by the RBI while issuing the Directive;
The Directive was tainted by malice under law as it was issued in bad faith to achieve an object completely different from the one for which the power was entrusted; and
The Directive was extreme, failed the test of reasonable proportionality and violated the fundamental right to practice any profession, carry on any occupation, trade or business.
With respect to the above arguments raised before the Supreme Court, the RBI had made the following submissions;
Virtual currencies do not satisfy the criteria of storage of value, medium of payment and unit of account, required for being acknowledged as currency, and are capable of being used for illegal activities due to their anonymity;
The Directive is legislative in character and within the wide powers conferred upon the RBI under the various legislations which, inter alia, empower the RBI to operate the credit and currency system of India, regulate the financial system of the country, including the payment systems and issue directions in this regard;
RBI applied its mind while issuing the Directive, which is established through the various advisories issued by the RBI previously (as mentioned above) and the reports contributed by the RBI over the years;
There cannot be an unfettered fundamental right to do business on the network of entities regulated by the RBI, and as a result, the Directive is not violative of any fundamental right;
The Directive is not excessive, confiscatory or disproportionate since RBI had provided a three-month time period to affected parties to sever their relationship with banks; and
The Directive was necessary in the interests of the consumers, the payment and settlement system of India as well as for the protection of regulated entities against exposure to high volatility of the virtual currencies. Given its regulatory powers, RBI is entitled to take pre-emptive measures in public interest where the power to regulate includes the power to prohibit.
Based on the above contentions, the Supreme Court, through its order dated March 4, 2020 (“SC Order”), held that the RBI has the requisite power to regulate or prohibit an activity involving virtual currencies, and had, in fact, applied its mind in this case without being vitiated by malice in law. However, the SC Order set aside the Directive primarily on the ground that it was a disproportionate restriction on the constitutional right of freedom of trade and commerce since, amongst other reasons: (i) RBI was unable to establish any adverse impact of the activities carried on by virtual currency exchanges on entities regulated by the RBI (viz. banks); and (ii) virtual currencies have not been prohibited in India as acknowledged by the RBI in its submissions. Supporting the contention raised by the petitioners that access to banking is critical, the Supreme Court found that denial of such access tantamount to disconnecting their lifeline (i.e. interface with the banking sector)) and is not reasonable and a disproportionate restriction.
Thus, while the SC Order set aside the Directive, it is pertinent to note that the Supreme Court does not remark or opine on the legality of cryptocurrencies in India.
Subsequent to the SC Order, the RBI has not issued any regulatory guidelines on the manner in which cryptocurrencies may be operated in India. Given this present ambiguity on regulation of cryptocurrencies, we understand that certain cryptocurrency platforms have recently approached the RBI seeking clarity regarding their legal and taxable status in India.
Separately, it may also be noted that on February 28, 2019, the Department of Economic Affairs under the aegis of Ministry of Finance, India released the “Report of the Committee to propose specific actions to be taken in relation to Virtual Currencies” which annexed a draft bill entitled “Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019” (the “Digital Currency Bill”). This Bill proposes to prohibit any person from mining, generating, holding, selling, dealing in, issuing or transferring cryptocurrency in the territory of India. Further, it also proposes that cryptocurrency will not be used as a legal tender in the territory of India and cannot be used for activities such as payment systems, investment, trading in securities, credit, exchange of currency etc. The Bill has not been passed by the legislature and is not enforceable law as yet.
Conclusion
SuperOne tokens are not subject to any regulations in India as the country does not have any legislation applicable to cryptocurrency. However, further guidance by the Indian regulatory bodies may be forthcoming concerning the legality of cryptocurrencies. Following a period of time during which Indian banks were not taking favorable actions against persons or companies associated with cryptocurrency, including closing bank accounts of those involved, the environment in India has, since then, appeared to become more welcoming of cryptocurrency activity in India.
Philippines Legal Framework
Introduction
In an advisory issued by the SEC in January 2018, the SEC expressed its position that when “a virtual currency (was) likewise analogous to any of the types of securities under section 3.1 of the SRC, there (would be) a strong possibility that the said virtual currency is a security”. Section 3.1 of the SEC Rules states;
“Securities” are “shares participation'' (generally, the SuperOne tTokens do not represent any “shares participation” in SuperOne. Based on the Information Reviewed, holders of SuperOne tokens do not have any ownership or voting rights or interests in SuperOne, and in the event of a sale, listing or winding up of SuperOne, SuperOne token holders do have any interests or rights in any of such processes) or interests in a corporation or in a commercial enterprise or profit-making venture and evidence by a certificate, contract, instrument, whether written or electronic in character. It includes a.o.;
Investment contracts, certificates of interest or participation in a profit-sharing agreement, certificates of deposit for future subscription;
Other instruments as may in the future be determined by the Commission.
Investment Contract
Section 26.3.5 of the 2015 Rules defines an “investment contract” to mean;
A contract, transaction or scheme (collectively, “contract”) whereby a person invests his money in a common enterprise (Under 26.3.5 of the 2015 Rules, “common enterprise” is deemed created when two (2) or more investors “pool” their resources, creating a common enterprise, even if the promoter receives nothing more than a broker’s commission) and is led to expect profits primarily from the efforts of others. An investment contract is presumed to exist whenever a person seeks to use the money or property of others on the promise of profits.
The sale of SuperOne tokens would not be considered to be an “investment contract” as defined in s.26.3.5 of the 2015 Rules because the purchasers of the SuperOne tokens are not “led to expect profits (to be generated) primarily from the efforts of others” through their purchases of the SuperOne tokens.
In particular;
It has been made clear to potential purchasers that ownership of the SuperOne tokens will not give rise to any entitlements to regular payments such as dividends or profit sharing, and SuperOne does not owe any debt or repayment obligation to SuperOne token holders;
On a substantive level, the value of the SuperOne tokens is determined primarily through a SuperOne token holder’s own use of the SuperOne Platform. In other words, in relation to each SuperOne token holder, the value of the SuperOne token is driven primarily through the actions of the SuperOne token holder in question, and any value that may be derived from the trading of the SuperOne tokens on the secondary market will be ancillary; and
SuperOne has made clear to potential purchasers of the SuperOne tokens that they may have no value outside of the SuperOne Platform, and that the SuperOne tokens are not an investment tool.
Reserved Power of the SEC
Section 3.1(g) of the SRC grants reserved power to the SEC to determine whether certain instruments should be deemed as “securities''. Since issuing the above-mentioned advisory in January 2018, the SEC has issued a number of cease and desist orders (“CDOs”) to various companies in which the question of whether certain virtual currencies are “securities” was considered. In particular, in the KropCoins (SEC CDO Case No. 01-18-046) case, the SEC exercised its power under s.3.1(g) of the SRC and determined that KropCoins were “interests in a profit-making venture”, and thus the registration and disclosure requirements under s.8 of the SRC applied.
While the facts pattern of the KropCoins case may not be applicable to SuperOne, it is noteworthy that when considering if an “instrument” is a “security” pursuant to s.3.1(g) of the SRC, the SEC chose to adopt the Howey Test (In the KropCoins case, the SEC noted that the Supreme Court of the PH has stated that in cases where the PH laws are “patterned after or adopted from those of the United States, decisions of the United States courts construing similar laws are entitled to great weight” and applied the Howey Test in the KropCoins case) in making its determination. The Supreme Court of the Philippines laid down the four elements of the Howey Test as follows (Power Homes Unlimited Corporation vs. Securities and Exchange Commission and Noel Maneror, G.R. No. 164182, February 26, 2008) “…a person (a) makes an investment of money, (b) in a common enterprise, (c) with the expectation of profits, (d) to be derived solely from the efforts of others.”
The four elements of the Howey Test are similar to the definition of “investment contract” described in Section 3(a) above. Based on the Information Review, there is a strong argument that even though the purchase of the SuperOne tokens may be seen as an investment of money in a common enterprise, it cannot be said that the purchasers would expect profits to derive solely from the efforts of others. This is because in relation to each SuperOne token holder, the value of the SuperOne token is driven primarily through the actions of the SuperOne token holder in question, and any value that may be derived from the trading of SuperOne tokens in the secondary market will be ancillary.
Sold or Distributed within the Philippines and Distribution
The SRC is territorially-oriented, and the registration requirements only apply if the “securities” are sold or offered for sale or distribution “within the Philippines”. SuperOne therefore could take the position that the SuperOne token (on its own) is not sold or offered for sale or distribution “within the Philippines”. That said, there are certain potential weaknesses in such a position outlined below.
Not Within the Philippines
Based on the Information Reviewed, it is justifiable for SuperOne to take the position that the SuperOne token (on its own) is not sold or offered for sale or distribution “within the Philippines”;
The issuer of the SuperOne tokens is not a Philippines company and the operation of the SuperOne tokens is done completely outside the Philippines with no servers, offices, equipment, or personnel in the Philippines;
SuperOne does not actively market to potential purchasers in the Philippines. While there are generic advertisements for worldwide or regional audiences, no advertisements specifically target Philippine citizens and residents; and
SuperOne does not actively acquire potential purchasers of the SuperOne tokens, i.e. all sales of the SuperOne tokens are carried out via reverse solicitation.
Solicitation
“Solicitation” is broadly defined under the 2015 Rule. Rule 3.1.17 of the 2015 Rule defines “public offering” as “any offering of securities to the public or anyone, whether solicited or unsolicited. Any solicitation or presentation of securities for sale through any of the following modes shall be presumed to be a public offering: electronic communications, information communication technology or other forms of communication”.
In the KropCoins case, the SEC noted, amongst other factors that, because KropCoin could be made available through its website, and because the website was accessible in the PH, there was a “public offering” of KropCoins as defined under Rule 3.1.17 (The facts of KropCoins can be distinguished from the SuperOne tokens in that the domain name of KropCoins’ website was domiciled in the Philippines, and that the directors/officers of KropCoins were Filipinos, with office/contact addresses located in the Philippines).
Draft ICO Rules
In August 2018, the SEC issued a first consultation Draft ICO Rules with the intention of finalizing the rules by the end of 2018. However, given the level of interest and responses received, the SEC extended the deadline and issued a second Draft ICO Rules in December 2018. In a recent press interview (Ibid note 2), the Chairperson of the SEC indicated that the SEC would be finalizing the Draft ICO Rules soon, although no specific dates were given.
A plain reading of the Draft ICO Rules suggests that the SuperOne tokens would likely fall within the definition of a “token” and thus, the sale of SuperOne tokens would likely be seen as an “ICO/token sale” under the Draft ICO Rules. Any person (an issuer) that conducts or proposes to conduct an “ICO/token sale” “targeting Filipinos” would be required to undergo a two-pronged review process with the SEC under the Draft ICO Rules;
Initial Assessment - the issuer must submit an initial assessment request to the SEC for its review to determine whether the token offered is a “security” under s.3.1 of the SRC. The submission must be made at least 90 days ahead of the issuance, and includes details of the project team, a review of the ICO project and its credibility as well as an external legal opinion explaining whether the token offered is a “security”;
The SEC will have 20 to 40 days to review and provide its determination in writing. If the SEC determines that the token offered is a “security” under s.3.1 of the SRC, the issuer must register the tokens in accordance with the Draft ICO Rules. The registration must be done at least 45 days before the issuance.
Since the Draft ICO Rules have yet to be implemented, it is unclear how the SEC would interpret what is meant by “targeting Filipinos”. SuperOne could take the position that the sale or offer for sale or distribution of the SuperOne tokens does not “target Filipinos” for reasons cited in Section 4 above. However, if the sale or offer for sale or distribution of the SuperOne tokens were deemed to be “targeting Filipinos”, the analysis in relation to whether the SuperOne token is a “security” as set out in Section 3 above would similarly apply.
Regulatory Consequences – Security Tokens under Draft ICO Rules
In addition to the registration and disclosure requirements, the Draft ICO Rules also provide for a number of substantive requirements in relation to ICO of “security tokens”;
Qualification Requirements of Issuers – existing Philippines corporations may file an application for registration. Non-residents may only file for registration if the security tokens have been registered in another jurisdiction that has signed an information sharing arrangement with the SEC and that the issuer provides sufficient proof of such registration and regulatory framework. In absence of any of these conditions, the foreign issuer must establish a branch in the Philippines.
Advertising – the issuer is only allowed to use certain types of media to advertise its tokens, including the issuer’s website, social media and blogs, direct mailing, etc. Contents of the advertisements must not be deceptive, false or misleading.
Escrow Arrangement – unless the SEC specifically approves otherwise, the issuer is required to engage an independent and reputable escrow agent to safekeep the sale proceeds and the private key of the issuer’s wallet. The proceeds will be released in accordance with the escrow agreement, which will expire upon full usage of the proceeds.
Refunds – under the following two scenarios, the issuer shall return the funds to the investors: (i) the ICO/token sale does not reach the soft cap (soft cap refers to the minimum amount of funds needed and aimed for by the ICO project) set out in the registration statement; or (ii) the ICO project is abandoned before completion.
Conclusion
SuperOne tokens are not subject to any regulations in Philippines, and thus are not subject to the registration and disclosure requirements under the Securities Regulation Code (Republic Act No. 8799) (“SRC”) and related implementation rules issued by the Securities and Exchange Commission (“SEC”) (collectively, “SEC Rules”), including the 2015 Implementing Rules and Regulation of the SRC (“2015 Rules”). Examined regulations, amongst others, during the review included the SEC Rules, the 2015 Rules and the second consultation draft of the Rules on Initial Coin Offering (“Draft ICO Rules”) issued by the SEC on 27th December 2018.
Based on the information review, there is a strong argument that the registration requirements under s.8 of the SRC does not apply to the SuperOne tokens because (a) The SuperOne token is not a “security” as defined under s.3 of the SRC; and (b) even if the SuperOne token were to be considered a “security” under s.3 of the SRC, the SuperOne token is “not sold or offered for sale or distribution within the Philippines”.
However, once the Draft ICO Rules (as currently drafted) become effective, it is likely that the SuperOne tokens would be seen as a “token” as defined under the Draft ICO Rules. If the sale of SuperOne tokens will not be “targeting Filipinos”, then SuperOne will not be required to comply with the registration requirements under the Draft ICO Rules. If the sale of SuperOne tokens will be “targeting Filipinos”, then SuperOne will be required to submit an initial assessment request to the SEC to determine whether the SuperOne tokens are a “security” as defined under the SRC. If the SEC determines that the SuperOne tokens are a “security”, then the registration requirements would apply. Given that the Draft ICO Rules have yet to be implemented, it is unclear how the SEC would interpret what is meant by “targeting Filipinos”.
In a recent press interview, the Chairperson of the SEC indicated that the Draft ICO Rules would be finalized soon, although no specific dates were given. In addition, the SEC had earlier indicated that they would issue guidelines for virtual currency exchanges (VCE), but draft rules for VCEs are yet to be released by the SEC to date. SuperOne may wish to engage with the SEC to discuss the potential implications of the Draft ICO Rules and VCE rules (if any).
Regulatory Compliance
SuperOne takes a measured, and prudent approach to regulatory compliance and this strategy will become increasingly sophisticated and rigorous, as its international user base grows. In this work SuperOne seeks to ensure that its awareness of the regulatory background, including any relevant changes, in each of its key regulatory jurisdictions is as current and accurate as possible.
SuperOne also seeks to establish and maintain good working relationships with regulatory authorities, which have, or may in the future have, influence or relevance to its business.
SuperOne determines whether or not to permit players or members in a given jurisdiction, based on some factors, including; terms of service level agreements, the specific laws and regulations of a jurisdiction combined with supranational law, as well as enforcement policies and history. In jurisdictions where SuperOne has physical operations and incorporations; SuperOne takes great care to ensure that its operations are in compliance with the terms of those jurisdictions.
In general, we could say that most jurisdictions allow SuperOne to offer its games and tokens without a permit. However, there will be jurisdictions where SuperOne definitely cannot offer its games or tokens, and there will also be jurisdictions where this is somewhat an uncharted area or where supranational laws could be claimed.
SuperOne uses leading law resources to carry out legal briefs and opinions for its products and operations, and SuperOne works actively to continuously assess the legal aspects of its operations.
Intellectual Property
Our success depends in part upon our ability to use and protect our core intellectual property. We rely on the EU, international and common law rights, as well as contractual restrictions. We control access to our intellectual property through license agreements, confidentiality procedures, non-disclosure agreements with third parties, employment agreements, and other contractual rights to protect our intellectual property.
In addition to contractual arrangements, we protect our intellectual property rights by relying on a combination of copyright, trademarks, patents, domain names, trade secrets, and trade dress. Where appropriate, we pursue the registration of designs, copyright, domain names, trademarks, and service marks, in the EU and in other jurisdictions. Our trademarks in the EU and elsewhere relate to the SuperOne brand, our game names, app icons and game elements where appropriate. While most of the intellectual property we use is created by us, we have, in some cases, acquired certain rights to proprietary intellectual property from others.
We also generally control access to and use of our intellectual property and other confidential information using internal and external controls, including contractual protections with employees, contractors, and partners, and the protection of EU and international copyright laws. Despite our efforts to protect our trade secrets and proprietary rights through these efforts, unauthorized parties may still copy or otherwise obtain and misuse our intellectual property. Protecting our intellectual property rights is costly and time-consuming. Any unauthorized disclosure or use of our intellectual property could affect the reputation of our games or brand and make it more expensive to do business thus harming our operating results. Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to copy or otherwise obtain and use our technology and games. To the extent that these tactics are employed with respect to any of our games, it could reduce our revenue that we generate from these games.
In addition, we cannot be certain that our intellectual property does not or will not infringe valid patents, copyrights or other intellectual property rights held by third parties. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others, as discussed in the risk section of this whitepaper. Failure to protect or enforce our intellectual property rights or the costs involved in such enforcement could harm our business and operating results. As we face increasing competition and as our business grows, it is very possible that we will face in the future, allegations by third parties, including our competitors and non-practicing entities, that we have infringed their trademarks, copyrights, patents and other intellectual property rights.
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