I am writing this while I am very sleepy so this prose may not be the best.

I think Valkenburgh is on the right track and you will note I had mentioned some theories about that also in private communications we’ve had. You’re welcome to pass on my public comments to him.

4‍. Those who argue that the investment contract can be separated from the issued tokens via for example a SAFT, are incorrect. A report issued by the Cardozo Law School in New York explains that SAFTs essentially subvert the substance of the definition of the investment contract security type, because the jurisprudence of a SAFT asserts that—a bright-line rule requiring presence of utility such as consumptive use, combined with irrelevant timing—supersedes or subsumes the economic reality of a securitized investment. I wrote a document which more fully summarizes this which can be provided if you ask for it.

The main point of my summary of the Cardozo report above is that the SAFT tries to establish a bright-line rule, i.e. a definite point of demarcation. And that I believe is incorrect.

Attorney Robert Rosenblum had explained in the C-Span video of the hearing you had provided in your prior message, that the problem is defining when is the transformation to that stage where the free market is sufficiently in control of the investors’ investments. He stated rather than battle it out in the courts, it would be better if the SEC provided a clear demarcation.

Remember the importance of the free market aspect which I will quote from my prior post:

Tokens become commodities when the free market is primarily in control of the future value as explained in IS BITCOIN A SECURITY? by Jeffery E. Alberts & Bertrand Fry on page 20:

If the expectation of economic return from an instrument is based solely on market forces, and not on the efforts of the sponsor, then the instrument does not satisfy this prong of the Howey test. (Noa v. Key Futures, Inc., 638 F.2d. 77 (9th Cir. 1980).)

And there’s another issue. Even if the tokens and ledger have become free market dominated such that the tokens are no longer securities, the original issuers are still liable due to non-registration of the original securities and improper disclosures.

The SAFT isn’t a magic wand that provides that clear demarcation because having a functional ledger system and token doesn’t mean that the free market is now dominating the efforts to protect the investors investments. For example, Ethereum proved that it was still dependent on Vitalik (the original issuer) to unilaterally violate the protocol and steal back the The DAO attack theft. However in the case of the Ethereum we can argue that the free market was in control because some of the miners forked off and retained the original protocol as Ethereum Classic. So that is how we can conclude that Ethereum is no longer a security. Whether the original issuance was a security is a separate issue. Proof-of-work airdrops force the miners to choose one of the forks. Proof-of-stake does not have this property and an air drop doesn’t create any competition because the whales who control the voting are the same in both forks. This is because proof-of-stake has the nothing-at-stake problem. No common resource is consumed by controlling more than one fork in proof-of-stake; whereas, proof-of-work consumes electricity so if you want to mine both forks you spend electricity on both (this forces miners to choose which fork to allocate their mining resources to).¹

Whereas, consortium blockchains such as Steem are obfuscations of the fact that Steem’s original issuers now affectionately known as “STINC” (after they captured 50–80% of the token supply with the premediated sneaky instamine) are still in control and there is no free market.

Thus I conclude:

1. Issuers can remain liable if they issued illegally, even if the tokens end up eventually being non-securities when the control over the tokens and ledger becomes under control of the free market and miners. The SAFT was correct to issue only in compliance with Reg D (or some other Reg exemption from registration). ^{_{(I and others have documented that EOS did not issue in compliance, yet I am waiting to see if they’ve bought off the SEC with their Goldman Sachs connections or if they are untouchable because of legally structuring the culpable parties in other jurisdictions.)}} Proof-of-work issues without a centralized issuer so doesn’t have this problem.

2. Only if the original issuers have lost control to a diverse free market have the tokens transitioned away from being securities. For proof-of-work this is always the case because there are no centralized issuers and decentralized permissionless miners issue. Consortium blockchains such as proof-of-stake and DPoS (which power Steem and EOS for example) are not plausibly able to transition away from the control of the original issuers who issued to themselves in obfuscated ways (and we documented this going on with EOS also). They can not be truly decentralized because they require oligarchy control otherwise they will not function.

(Note when clicking my links above, continue clicking through all links in the linked posts to dig down into all my past writings which have the details to support my claims)

So the demarcation is very simple for proof-of-work. Even though proof-of-work is also not decentralized and falls into an oligarchy as well, the issuance was decentralized and miners have formed their control via free market competition.

For proof-of-stake the demarcation is dubious and probably better to just conclude that these tokens remain securities forever.

Smart contract issued tokens that are transacted on a proof-of-work ledger (e.g. Ethereum) are in essence similar to proof-of-stake if the power to change the smart contract code rests with voters who hold the tokens, and presuming the tokens were not issued with decentralized proof-of-work. Thus in essence those voters still rely on a common enterprise with voting shares. It difficult to imagine how the Ethereum miners would fork to change a specific smart contract. They did for the The DAO but only because that was such a huge theft. If Ethereum keeps forking into competing chains for every smart contract bug then perhaps we can conclude smart contract issued tokens do eventually become non-securities, but I am very doubtful about that. In fact the entire utility token mirage is a ruse. They could simply use the ETH or BTC token, there is absolutely no justification for them to issue a token other than to raise funds. And that is the real elephant in the ICO room of this utility token ruse.

That should be some stimulating information for him to chew on. I think he is (more than) smart enough to understand the power vacuum concept of voting which I linked to above.

¹ _{Note I have a new consensus algorithm which is not proof-of-work nor proof-of-stake but which removes control from the whales who hold most of the token, so this is a different paradigm for achieving the loss of control required to attain non-securitization status.}