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Detailed Explanation by U.S.Securities Lawyers: Is Uni Token a Securities?



Uniswap is currently the largest decentralized exchange (DEX) by trading volume, and the first DEX that can truly compete with some of the larger digital asset exchanges in terms of daily trading volume. This can be proved by Uniswap's daily trading volume once surpassing Coinbase pro. A few days ago, Uniswap issued the governance token Uni, and conducted an unprecedented airdrop. So, is Uni a security?

After the Uniswap agreement airdropped Uni tokens to users, some legal commentators in the United States believe that Uni is undoubtedly a security, and the airdrop is an illegal issuance, and the Uniswap team has written a gauntlet. It depends on whether the SEC dares to hold them accountable. This is the conclusion we might draw from a brief glance at Uni's offering status, combined with past precedent and official and unofficial regulatory statements. However, if someone considers that the Uniswap team is well-funded and supported by high-quality venture capitalists, and Uniswap is likely to borrow the legal, regulatory, technical and other professional knowledge of these venture capitalists, then you may be more cautious. To consider the situation of Uniswap issuing tokens, you may find that Uni tokens are likely not within the enforcement framework of US securities laws.

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The SEC’s first significant regulatory statement on whether tokens are securities was the July 2017 DAO report, which discussed potential factors for “offers of securities” that would require registration with the SEC and/or SEC regulation. The report details the underlying factors of the old Howey test and its successor, but in short, a token offering would be a securities offering if:

1) Have money to invest

2) In general business

3) Have a reasonable expectation of profiting from the efforts of others.

Since then, the U.S. Securities and Exchange Commission (SEC) released the “Analytic Framework for Digital Asset ‘Investment Contracts’” in April 2019, aiming to further improve the legal clarity of ICOs by defining whether investment contracts in ICO offerings are securities. The Framework provides a comprehensive, but not exhaustive, list of factors the SEC considers in determining whether a token offering is a securities offering. These factors include:

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Purchasers of tokens rely on the efforts of "active-zce participants",

Is the network still under development or fully functional

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Buyers have reasonable expectations of continued participation and growth in the network, regardless of the underlying tasks or responsibilities expected of active-zce participants.

Purchasers can reasonably expect that the efforts of active-zce participants will result in capital appreciation of the token

Whether the distribution is user-oriented or broadly user-oriented as well as non-user

Holders can use the intended function of the token, etc.

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Between these two formal reports, William Hinman, director of the SEC's Division of Corporate Finance, stated in June 2018 that certain token offerings, which may begin as securities offerings, may become sufficiently decentralized that no entity, individual Or the group may provide necessary managerial or entrepreneurial work (for example, controlling the network's existence, development or its earning potential). The most interesting thing is that Hinman also pointed out that there needs to be a disclosure system, like the US securities law system, designed to provide securities buyers with information (background, financing, plans, financial interests, etc.) so that buyers can do what they want before buying. make informed decisions. Hinman argues that as the web becomes truly decentralized, it becomes very difficult and less meaningful to find an issuer or sponsor to make the necessary disclosures. In other words, it is basically worthless to use the disclosure system of the securities law to supervise a decentralized project and its tokens.

Additionally, in February 2018, SEC Chairman Jay Clayton testified to the U.S. Senate Banking, Housing, and Urban Affairs Committee on the roles of the SEC and CFTC on virtual currencies. Clayton testified that the SEC's mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. "Determining the scope of securities offerings and sales is a case-by-case analysis, utilizing a principles-based framework that has served U.S. companies and U.S. investors well during a period of innovation and change that has lasted more than 80 years," he said. services.” He also said he had not seen an ICO that was not an offering of securities, stressing the need to protect retail investors.

The release of the aforementioned SEC guidance has also coincided with a number of enforcement actions against ICOs. Most of these are clear securities offerings, for the main reasons: the degree of control exerted by the promoters before and after the related token issuance is significant, or the network that is supposed to support the use of the tokens is not functioning, or requires the promoters to carry out the necessary Management and Entrepreneurial Efforts.

The Uniswap team has established a huge user network, and users distributed around the world use this exchange protocol. The team never raised funds through a token offering to create the network, it was only after the network was fully operational that the team distributed the Uni Governance Tokens to all users of its protocol. Only users, team members, investors and advisors are entitled to the initial distribution of Uni Tokens from Uniswap. At the same time, the network is open source and forkable. The initial governance rules assign power directly to Uni Token holders to guide the future development of the exchange protocol. The team is committed to avoiding governance proposals, will not vote for any proposals, and will not participate in the development of the v2 protocol. Essentially, the Uniswap team has delegated all power to the community.

Uni tokens have one fundamental function: to vote on proposals and influence the future direction of the network. But the network is not controlled by a centralized entity, it is controlled by a widely distributed group of coin holders. During the initial distribution phase, no one becomes a user with the intention of becoming a Uni Token holder; therefore, there is no yield consideration for Uni Token distribution. Even users who tried to complete a transaction but failed for some reason were given a Uni airdrop.

According to available information, the network is no longer controlled by the Uniswap team. This team does not influence policy, cannot make unilateral changes, and has no control over basic network governance, auditing, finance, fees, etc.

If Uni is subject to the supervision of a registration system such as the US Securities Act, Uni will have to issue regular reports on financial performance, business development, etc. Not only are these impossible to define or measure, there is also the question of who should actually be responsible for fulfilling such obligations.

Therefore, this article believes that Uni Token does not meet the SEC's test, so it cannot be considered a security. Of course, this is not legal advice and, as the SEC states, these decisions are based on factual circumstances.


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