Education | 4 min read

"Security Tokens Ruin Decentralization", Says No One Ever

Me: "sEcuRitY tOkEnS rUiN DecEntRaliZatiOn". lol not really.

We now understand that most utility tokens are essential for protocols and their purpose in providing a role into their ecosystem to entice users in providing resources into it. With the introduction of Security Tokens, how will this affect Basescore and our current due diligence strategy? First off, we can take the token metric out of it and look at companies similar to a true venture capitalist.

Crypto Token Usage

History of the Howey Test

Due to a case in the Supreme Court ruling in 1946, the SEC established the infamous Howey Test. This was used to determine if a particular arrangement (in our case, these security tokens) involved an investment contract or not:

In 1946, the Supreme Court heard a case (SEC v. Howey) that concerned whether a leaseback agreement was legally an investment contract (one of the types of investments that is listed as a "security" under the Act). In Howey, two Florida-based corporate defendants offered real estate contracts for tracts of land with citrus groves. The defendants offered buyers the option of leasing any purchased land back to the defendants, who would then tend to the land, and harvest, pool, and market the citrus. As most of the buyers were not farmers and did not have agricultural expertise, they were happy to lease the land back to the defendants.

After that, the SEC made a litmus test that meant under the Howey test, a transaction is an investment if:

  1. It is an investment of money
  2. There is an expectation of profits from the investment
  3. The investment of money is in a common enterprise
  4. Any profit comes from the efforts of a promoter or third party

This is concerning if we are trying to allow private companies to fund their businesses and allow the payment of dividends without deeming it illegal.

Why Do We Need a Security Token?

Through my years of discovering and evaluating different Blockchain companies, it's clear that 99% of these companies do not need a token. I've seen many viable business models, and projects that have taken off, but with no recourse back to their "investors". I've also seen many projects I believe will succeed, but I will personally not invest in because the token utility just isn't there. You can see many private equity firms take a personal equity stake in these companies understanding they will succeed. However, the retail investor will not get to reap these same benefits, and instead they will be on the short end of the stick by providing undiluted investment to receive shit utility tokens that provide no utility at all.


SEC & "Protecting Investors"

Now when we consider that fact, wouldn't it be crazy to not allow the retail investor to partake in the investment of valid security tokens? Essentially all the retail investors are heading into a trap that is allowed by the SEC, but not allowed to partake in equity stakes of these exact companies.

Summary + Looking Forward

We are trying our best at Basescore to prevent people from investing in these specific utility coins that do not provide utility. We accept the regulation and the acceptance of Security Tokens as this allows the retail investor to invest in projects they believe in, without the token metrics becoming another factor to invest.

This is an article that is determined on teaching you these core lessons:

  • Good projects might not have good token metrics
  • Security tokens allow you to invest into good projects without worrying about token metrics
  • SEC has their priorities messed up when they say they are protecting investors by making security tokens illegal
  • Utility tokens are only good for protocols and infrastructure that requires computer resources and active participants.
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