In 2003, I had the best business idea ever. The MBTA had recently announced an upcoming increase in the price of Boston transit tokens, from a dollar to $1.25. The change would not be effective until the following January, which meant that any T tokens acquired before then would be guaranteed a 25% return. I had just over a month to hoard as many tokens as possible.
I wasn’t the only one with this strategy; many of my classmates did the same. But after a month-long buying spree, it became clear that realizing those profits would be a pain in the ass.
We could never use all those tokens ourselves, and there was no secondary market because all our friends had made the same brilliant investment. If only T tokens were tradeable on the blockchain!
How many potential buyers were discouraged by the lack of a convenient aftermarket? Without the liquidity limitation, the MBTA could have held a far bigger token sale. Maybe it could have paid for a new railway. Maybe another Big Dig. Maybe even a hyperloop!
Why don’t we finance all our infrastructure projects with token sales? Is Trump still looking for ways to pay for that wall? Issue a Wall Token and put it on the blockchain! Each Wall Token confers the right to one border crossing.
But it turns out such Tokens might constitute a security.
Here’s a 1977 paper about property developers who finance their facilities by selling usage licenses before construction. Two fun examples:
In the case of Holloway v. Thompson, a landowner raised money for a cemetery by selling certificates entitling the holder to a future burial spot. After the cemetery was constructed, an elderly couple sued the developer because they were unable to resell their unused spots. They had purchased 31 spaces, hoping to flip ‘em for a quick profit. The court determined that the burial rights were unregistered securities, and buyers were refunded.
In Forman v. Community Services, Inc, a property developer sold “shares” of a low-income housing project, which could be exchanged for a three-year lease on a future apartment. After construction, the lease agreements were less valuable than expected, and the shareholders sued. The Supreme Court determined that the housing shares, despite being explicitly sold as “shares”, were not securities. The case was dismissed. It helped that the defendant was a non-profit housing co-op trying to do a civic good.
There are many more cases, and every shade of grey in between. In the 1970s, a spate of country clubs raised money through initial membership offerings, at which point the SEC directed its staff to stop issuing no-action letters in this area and advised that past letters should not be relied upon: “The Commission is concerned that inferences may be drawn from the issuance of no-action letters in this rapidly-evolving area.”
That was 1976. Forty rapidly-evolving years later, the Commission is still fumbling to crank up its Gatling guns. Meanwhile, token offerings spring up every day, each one scammier than the last. It’s tough to be a regulator! The SEC is a massively underfunded agency that was established as part of a New Deal effort to create make-work jobs. For half a century its purpose was to hire people to push papers and write rules. In 1984, Congress expanded that role by giving them the authority to enforce their rules, but without the actual budget to do so. The SEC ought to consider an ICO.
Donald J. Regan. Securities Regulations: When is a Club Membership a Security, 10 Loyola of L.A. Law Review, 356 (1977).