Social Media Managers: Is Your Firm's Token a Security?

Photo by KeremYucel/iStock / Getty Images
Photo by KeremYucel/iStock / Getty Images

Vernon H. Budinger, CFA and CA

If you are a Social Media or a Digital Marketing Manager working with Token Launches (otherwise known as ICOs), then you need to understand the attributes that qualify a Token Launch as a security and bring SEC oversight if you want to avoid prison and to continue working in the finance industry.  Contrary to the belief of many crypto-geeks, the ability to legally launch a crypto security without registering the launch because of SEC exemptions does not mean that you and your bounty campaign are exempt from SEC Regulations.

The SEC is very clear, the promotors of securities in the United States must comply with the spirit of the Securities Laws in the United States.  Two concepts provide the foundation for that law:

·        require that investors receive financial and other significant information concerning securities being offered for public sale; and

·        prohibit deceit, misrepresentations, and other fraud in the sale of securities.


Social Media and Digital Marketing managers are as responsible for complying with these two objectives, as is anyone involved with the launch.  Ignorance of the law excuses no one.
— Vernon Budinger


What is a Security?

William Hinman, Director of Supervision of Corporate Finance with the SEC, answered this question with a detailed and logical explanation on June 14th at the Yahoo Finance All Markets Summit in a speech titled “Digital Asset Transactions: When Howey Met Gary (Plastic).”

Hinman says that if you have a crypto-operation that is fully functioning and you sell tokens only to the owners or participants of that operation for some benefit stemming from that operation, then your token launch probably does not qualify as a security. 

However, if you have plans for a future operation and you launch tokens to the general public to finance the development of that operation and the investors who buy the tokens are passive participants who expect a return based on the successful implementation of that operation, then you are probably issuing a security.

I was involved in an attempted token launch that would have qualified as a security and provides an excellent example.  An entrepreneur asked for advice on launching a ERC-20 token for his grocery-based crypto-service that was ready begin operation.  The idea was that the token’s utility would provide some kind of “buyer loyalty” benefit to the owner of the token.  

If the entrepreneur had limited the token to the grocery-based segment of his crypto-service and had planned to sell the tokens only to people who planned to use them in the grocery service, then the tokens probably would not have been a security according to Hinman’s definition, since his grocery operation had been developed, tested, and was ready to launch.

However, upon further questioning this entrepreneur revealed bigger plans; he wanted to start similar but undeveloped crypto-services across several other consumer retail sectors: sports equipment, electronics and more.  In addition, he wanted this token to be one of the biggest and most liquid tokens in the crypto market.

Three aspects of the entrepreneur’s plan turned this planned utility token launch into a security.  First, he was selling the tokens to finance future operations under development and any return would be based on this entrepreneur’s ability to meet this objective.  The token buyers would thus have a financial interest in the enterprise.  Hinman informed the audience that this is a key test that regulators will be applying to token launches. 

Second, he planned to sell the tokens to many people: he would have needed to build a retail operation somewhere between the size of Target and Walmart to accommodate the “buyer loyalty” component of the token’s utility based on the quantity of tokens that he planned to sell. 

Thus, the implicit objective of most of the investors would have been to sell the tokens for a profit in the secondary market after the operation was complete and this brings us to the third component of Hinman’s criteria:

“When we see that kind of economic transaction, it is easy to apply the Supreme Court’s “investment contract” test first announced in SEC v. Howey.[4] That test requires an investment of money in a common enterprise with an expectation of profit derived from the efforts of others.”

Clearly, this planned token launch was a security and would have fallen under SEC regulation. I explained the SEC regulations to the entrepreneur, but I walked away from the deal when he did not want to share financials, write a white paper, or provide any further information about the strategy.

Prohibited Advertising for Securities

This type of questionable transaction is common in token-land.  Facebook, Google, and Twitter have all stopped taking advertisements from token launches because there is so much fraud and misinformation.

Social Media Managers and other Digital Marketing Executives need to be ready to make the same decision: walk away from a token launch if the lead entrepreneurs want to advertise tokens through a bounty campaign or marketing process that violates SEC Regulations.  One guaranteed action to bring the full ire and wrath of the SEC is to create a non-compliant Bounty Campaign for a token launch that is a security.   

The SEC has strict rules regarding advertising new security issues; the rules are designed to promote fairness and combat deception.  Raymond Trapani learned this the hard way. On April 20, 2018, the SEC filed an amended complaint against Sohrab (“Sam”)Sharma, Robert Farkas, and Raymond Trapani for “raising $32 million from thousands of investors through the sale of unregistered securities issued by Centra Tech, Inc.  According to the complaint, “the defendant promoted the Centra ICO by touting nonexistent relationships between Centra and well-known financial institutions, including Visa, Mastercard, and The Bancorp.”  Part of the complaint focused on Centra’s “Bounty Program” and Raymond Trapani was responsible for overseeing important aspects of the Centra’s “Bounty Campaign.”


According to the SEC’s complaint, Centra’s Bounty Program “promised to compensate bounty participants for quality reviews, posts, likes, and similar activity touting Centra and its ICO.”  Centra had arrangements with celebrities like DJ Khaled and Floyd Mayweather in its bounty program. The complaint alleges that Centra had reserved a “Bounty Pool” of 2% of the offering, or 2 million tokens, for this purpose but hid the relationship between Bounty Participants and Centra from the public through deceptive statements to news outlets such as Fortune magazine, which subsequently published the erroneous information.

Innovative new technologies play an important role in sponsoring innovation, creativity and productivity, but only if the public can trust the market.  Financial Professionals should understand the role that the SEC’s regulations play in developing markets that are fair for everyone and promote the growth of the economy.  On the other hand, anyone who buys a Token or a Cryptocurrency only on the recommendation of celebrities such as Floyd Mayweather and DJ Khaled probably deserves to lose their money.


Vernon Budinger is a Finance Professional with more than 25 years of experience working with investments.  He is the owner of Neural Profit Engines, a social media company for Financial Advisors, Alternative Investments, and Hedge Funds.