Gu Yanxi: UNI may be prosecuted by the SEC after being identified as a securities (www.blockcast.cc)

From the perspective of Howey Test, UNI can easily be recognized as a security.

Original title: “SEC is likely to sue UNI”
Written by: Gu Yanxi, founder of the American Liyan Consulting Company, a researcher and practitioner in the blockchain and encrypted digital asset industry

The Uniswap project party recently issued its token UNI. In view of the nature of the token, the method of issuance, the target of issuance, and the number of UNI’s US holders of no less than 2,000 users, I think it is likely to become the subject of SEC prosecution.

The nature of UNI

According to several dimensions of the Howey Test defined by the United States for securities products, if the holder expects future profits and achieves the appreciation of the product through the efforts of a common enterprise, then the product should be defined For securities, its mode of operation should also be operated in accordance with securities regulatory regulations.

Uniswap is developed and launched through a team. Previously, this project also received investment support from the capital. Moreover, the later operation continues to develop, and there will still be a team responsible. Part of the UNI distribution plan is allocated to the business development team and investors, and a part is reserved for future employees. Therefore, behind the UNI can actually be regarded as having an ordinary enterprise working hard.

In the process of obtaining UNI, users participate, and actually participate by investing funds. Although not direct investment, they also obtain UNI by investing funds. And the purpose of obtaining UNI is for the expectation of future appreciation. So at least in these two dimensions of the Howey Test, UNI meets the definition of securities products. If UNI is considered a security, then its subsequent related operations are not in compliance with the requirements of the Securities Law.

In addition to the above analysis of UNI attributes according to the definition of securities, other characteristics of UNI also make it more like a securities. UNI’s rights include dividend rights and voting rights. This is only one ownership difference from the equity contained in the stock. In addition, UNI is already trading on multiple centralized matching trading platforms, and its trading methods are the same as stocks.

Compared with Ethereum and Telegram

Among all encrypted digital currencies, the SEC only believes that Bitcoin and Ethereum are not security products. For other encrypted digital currencies, the SEC has never made a clear statement. Ether is designed as a tool token. The fundraising process to support the development of Ethereum can be regarded as the pre-sale process of the product. Moreover, Ether does have tool-type attributes, which are actually used in the operation of Ethereum. So from these perspectives, Ethereum can be considered as a utility token (Utility Token) instead of a security token (Security Token). Therefore, the SEC can completely determine that Ether is not a security product, so naturally it does not fall within the scope of its supervision.

The SEC initiated a lawsuit against Telegram in early October 2019, arguing that Telegram’s token, GRAM, is a security, but its operation violates the securities law, so it requires the court to prohibit the issuance of GRAM in the U.S. market and globally. The SEC won the lawsuit, GRAM was not issued in the end, and the funds raised by it were returned to investors. The fund raising process of the Telegram project is carried out in accordance with the US Reg D method. The operator of its project tried to complete the development of its underlying public chain within the scope of compliance, and began to distribute GRAM only one year after the investor’s investment in obtaining GRAM, and after the underlying public chain went online. Despite this, the SEC determined that GRAM’s operation violated US securities laws. Now the UNI product itself is easily recognized as a security product, so it is easy to be sued by the SEC.

Consideration of whether the SEC will sue a project

An important consideration in whether the SEC prosecutes a project is its impact on the US securities market. In 2019, it chose to settle out of court with EOS. This is because the fundraising process and operation of EOS are mainly overseas in the United States and have little impact on the US securities market. Therefore, although the EOS project itself violated the US securities laws in many ways, the SEC still adopted an out-of-court settlement.

In contrast, the SEC chose to sue Telegram. This is because Telegram has issued approximately 2.9 billion digital tokens. One billion of these were sold to 39 investors in the United States during the private placement stage. The purpose of initial investor purchase must be expected profit. Therefore, the early investors actually played the role of underwriters. If GRAM is allowed to be issued freely, because its underlying blockchain is based on the blockchain and a highly liquid digital token trading platform in the market, these GRAM tokens will flood the US market. These securities products will therefore circulate in the US market without operating in accordance with the securities laws. This is never allowed by the SEC.

UNI has now been issued and circulated to the US market, and has been traded on a centralized trading platform. If the SEC does not take measures to prohibit the circulation of UNI, then there will be more digital tokens similar to UNI circulating in the US market. In addition, since such digital tokens are produced and flowed to the market very quickly, if the SEC does not act quickly, then its supervision in this area will be difficult to take effect in the future.