# Securities Law Tokens > SKILL: Securities Law & Token Classification - Skill: `nickgallick/securities-law-tokens` (Agent Skill) - Install (CLI): `npx skillmds@latest add nickgallick/securities-law-tokens` - Raw SKILL.md: https://api.skillmd.com/api/skills/nickgallick/securities-law-tokens/raw - Safety review: pending (external: skill-scanner PASS, skillspector PASS) - Works with: Claude Code, Claude.ai, OpenAI Codex - Category: Coding & Dev Tools - Author: nickgallick (https://skillmd.com/u/nickgallick) - Updated: 2026-09-21 - Page: https://skillmd.com/skills/nickgallick/securities-law-tokens --- # SKILL: Securities Law & Token Classification **Version:** 1.0.0 | **Domain:** SEC, Howey Test, Token Structures --- ## The Howey Test *SEC v. W.J. Howey Co., 328 U.S. 293 (1946)* A token is a security (investment contract) if it involves ALL FOUR: 1. **Investment of money** 2. **In a common enterprise** 3. **With an expectation of profits** 4. **Derived primarily from the efforts of others** Fail ANY one prong → stronger argument it's NOT a security. --- ## Breaking Down Each Prong ### Prong 1: Investment of Money **Broad interpretation by courts:** - Airdrop with no purchase = stronger argument against (but see below) - If users staked assets, spent money on related product, or performed labor expecting token value → courts find "investment" broadly - Points-to-token conversion: if users spent money to earn points → arguably an investment **How to fail this prong:** - Pure airdrop with no associated purchase, no staking requirement, no work requirement - Free mint with no expectation created by issuer ### Prong 2: Common Enterprise **Hardest prong to avoid — courts interpret VERY broadly:** - "Horizontal commonality": all investors' returns from same pool → common enterprise - "Vertical commonality": investors' returns depend on the promoter's efforts → common enterprise - If all token holders' value depends on the same team's work OR same protocol → this prong is almost always met **Practical reality:** You cannot reliably fail Prong 2 for most token projects. ### Prong 3: Expectation of Profits **The marketing killer:** - Purely consumptive utility (use token to pay for service) → no profit expectation - ONE TWEET saying "we're going to the moon 🚀" or "early buyers will benefit" → profit expectation established - Token price appreciation through secondary market trading → courts find profit expectation - Staking yields → profit expectation **How to fail this prong:** - Stablecoin pegged to $1 → no appreciation expected → not a security - Governance-only token with no economic rights → weaker profit expectation argument - Meme coins (some argue): no team, no roadmap, no utility → no "efforts of others" creates profit **Critical rule for Nick:** Marketing is the biggest risk. Legal team must review ALL communications before release. The team's words — not just the smart contract — determine securities classification. ### Prong 4: Efforts of Others **The decentralization defense:** - "Sufficient decentralization": if no single team's efforts drive value, Prong 4 fails - Test: if the core team disappeared tomorrow, would the token function and retain value? - SEC Hinman Speech (2018): Ethereum is "sufficiently decentralized" → not a security (but this is a speech, not law; no Chevron deference post-Loper Bright) --- ## Key Enforcement Precedents ### SEC v. Ripple Labs (2023) — SPLIT RULING - **Programmatic sales** (on exchanges, no direct buyer-issuer relationship): NOT securities - **Institutional sales** (direct sales to sophisticated buyers): ARE securities - **Impact:** XRP on secondary markets can trade without SEC registration; institutional raises require registration - **Docket:** SEC v. Ripple Labs Inc., 20-cv-10832 (S.D.N.Y.) - **Status:** Settlement negotiations ongoing (2024-2025) ### SEC v. Terraform Labs / Do Kwon (2024) - LUNA/UST ruled securities; jury found fraud - Algorithmic stablecoin backing didn't save them from securities classification - **Lesson:** "It's a stablecoin" is not a safe harbor if profit expectations were created ### SEC v. Coinbase (ongoing 2024-2025) - SEC alleges multiple tokens listed on Coinbase are unregistered securities - Affects: SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, and others - **Impact:** Secondary market listing could trigger securities law even if original issuance wasn't a security ### SEC v. Uniswap (Investigation dismissed 2024) - SEC dropped investigation of Uniswap Labs - Significant: SEC declined to pursue DEX operator for facilitating trading of allegedly unregistered tokens - **Does NOT mean:** DEX operators are categorically exempt — this was a charging decision, not a legal ruling ### SEC Framework for Investment Contract Analysis (2019) - SEC staff guidance applying Howey to digital assets - Available at: https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets - Note: Staff guidance, not a rule — persuasive but not binding (especially post-Loper Bright) --- ## How Major Projects Structure Tokens to Minimize Securities Risk | Project | Token | Structure | |---|---|---| | Uniswap (UNI) | Governance-only | Airdropped, no profit promises from team, no fee distribution to holders (fee switch not activated until recently) | | Bitcoin (BTC) | Commodity | Fully decentralized, no issuing team, SEC explicitly says not a security | | Ethereum (ETH) | Commodity (SEC position) | "Sufficiently decentralized" per Hinman; but staking yields create renewed scrutiny | | Compound (COMP) | Governance + incentives | Distributed via protocol usage, not sold in ICO | | Lido (LDO) | Governance | No direct fee rights for token holders initially | --- ## For Agent Sparta Token (AST) — Specific Analysis **High-risk scenario:** Users buy AST on secondary market expecting value to increase as Agent Sparta platform grows → almost certainly a security (Prongs 1, 2, 3, 4 all met) **Lower-risk alternatives:** 1. **Utility-only token:** AST used ONLY to pay entry fees; no tradeable secondary market; team never promotes price appreciation 2. **No token:** Use USDC for all payments → zero securities risk from tokens 3. **Points system:** Non-transferable points that unlock features → not a security (no investment, no secondary market) 4. **Governance-only + airdrop:** Airdrop to existing users after platform is live; governance rights only; no financial rights - Risk: secondary market trading will emerge; SEC may still scrutinize **Safest path for MVP:** No token. Use USDC. Add tokenomics only after legal counsel designs the structure and regulatory environment clarifies. --- ## Compliant Token Launch Mechanisms | Mechanism | Who Can Participate | Disclosure Required | Cost | |---|---|---|---| | **Reg D (506b/c)** | Accredited investors only | No general solicitation (b) or with solicitation (c) | $50-200K legal | | **Reg S** | Non-US persons only | Limited | $50-100K legal | | **Reg A+** | Public (non-accredited OK) | SEC-qualified offering, up to $75M | $200-500K legal | | **SAFT** | Accredited investors | Sell investment contract now, deliver utility tokens when network live | $100-200K legal | | **No sale** | — | Airdrop only | $50-100K legal to structure | **Most projects:** No US sales + later airdrop to US users (reduces but DOES NOT eliminate risk) --- *This is legal research and intelligence, not legal advice. Consult qualified legal counsel before taking action.*