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title: "I've been thinking about how to do fundraising via cryptotokens for…"
date: 2017-06-13
source: facebook
type: Archer T. Ships shared a link.
---

# I've been thinking about how to do fundraising via cryptotokens for…

*June 13, 2017 · Facebook*

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[https://www.cuttingedgecapital.com/what-is-a-security-and-why-does-it-matter/](https://www.cuttingedgecapital.com/what-is-a-security-and-why-does-it-matter/){target="_blank"}
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I\'ve been thinking about how to do fundraising via cryptotokens for seasteads in a way that doesn\'t run afoul of SEC regulations. Note that in what follows, I\'m not a securities law expert\--this is simply a first pass at thinking out loud about what would be required. Also, this is US centric, as it\'s where I live.\
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This article discusses some of the issues involved:\
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[https://www.cuttingedgecapital.com/what-is-a-security-and-why-does-it-matter/](https://www.cuttingedgecapital.com/what-is-a-security-and-why-does-it-matter/){target="_blank"}\
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At the federal level, courts use something called the Howey test to determine whether something is considered a \"security\". Of importance to cryptotokens:\
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\"Importantly, the court concluded that "when a purchaser is motivated by a desire to use or consume the item purchased . . . the securities laws do not apply."\"\
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I think this is why airline miles are not considered a security\--they can only be used to buy flight tickets. I believe this is also how cryptotokens attempt to avoid regulatory scrutiny\--they are used to pay for the operation of the network (such as for gas on the ethereum network), not just act as representations of ownership.\
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However, 16 states (including California) have also applied a stricter standard than the Howey test called the \"risk capital test\". Basically, if the investors have something to lose, and they are not actively involved in the venture, then a token will be considered a \"security\".\
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\"The only cases in which California courts find something not to be a security are those where the investments are sufficiently collateralized and/or where the investors are actively involved in the venture.\"\
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Given the above tests, I think the following might meet regulatory muster:\
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1) Form a 501c7 social club. (The Barge at Ephemerisle, for example, is organized as a club). The club would be the owner of record of the seastead, and would manage the construction and operation of the seastead.\
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2) Solicit club members. Club members would be solicited for donations to pay for the construction of the seastead.\
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3) The club would issue tokens to club members in proportion to the amount they give. The tokens would be like airline miles, which they could use to pay for things aboard the seastead (rent, utilities, etc).\
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4) Once completed, donors could either use their tokens to pay for a room on the ship for their own use, or sell their tokens to someone else to use (or delegate the seastead management company to do so on their behalf).\
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5) Token holders would also elect the club\'s management team.\
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6) If the club dissolved, the assets would be sold, and any proceeds dispersed to token holders in proportion to the number of tokens they owned.\
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Whether the SEC takes action also seems to depend on whether they think you\'re a scammer or not. Therefore, projects which take measures to protect the funds from theft, and to ensure that the project is actually completed will likely suffer less regulatory scrutiny.\
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To help ensure that the project leads don\'t simply run off with the money, the club could set up two teams. The \"management\" team would lead the ship construction, hire contractors, etc. The \"accountability\" team would monitor their progress, and disperse money if they felt that the management team met their accountability targets. Every month, the management team would meet with the accountability team and set high, low, and mid confidence milestones for the month. A high confidence milestone is one that the management team think they can meet with 90% confidence. A mid-confidence target would be a target that they could meet with 60% confidence, and a 30% confidence targe is one they think they could make with 30% confidence.\
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The courts also look closely at how token are marketed. The more you talk about profit, returns on investment, the more likely tokens are to be considered a security.
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