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Dec 11, 2020 · 6 min read
2020 saw the rise of personal, social and community tokens — tokens that are connected with an individual, an artist or creator, or a group, rather than a protocol or application.
The most interesting aspect of these tokens is that typically, there is no existing structure for the relationships they seek to define. They are a nebulous collection of promises and intentions that can be molded to fit the different dynamics of each community.
When used effectively, these tokens have the potential to help communities coordinate around their shared purpose and objectives.
This post examines the US federal securities law treatment of social and community tokens. It is intended to help issuers of tokens think through some of the different pathways to non-security status, and to give some practical examples of things that could affect that status. Nothing in this post should be taken as legal advice. There can be no guarantee that a token will not be a security even if all of the positive characteristics in this document apply.
Practically speaking, there are five broad factors which can affect the analysis:
Based on the SEC’s digital asset framework, here are three potential pathways which may result in social and community tokens not being classified as securities, along with the factors which are relevant to the pathway. There may also be other pathways.