Did Brave Raise $35M by Illegally Selling Unregistered Securities?

This morning Brave Software (likely a Delaware Corporation meaning subject to US law), developer of a privacy-focused web browser, raised $35M in 30 seconds via an Initial Coin Offering (ICO) selling their basicattentiontoken (BAT) and joined a growing list of companies that over the past two years have collectively raised over ~$440 million via ICO. However, in the US there have been questions about whether companies are illegally selling unregistered securities via ICOs.

In the US securities are heavily regulated and illegally selling unregistered securities can result in significant fines and prison sentences. Specifically, “Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption.” This prompted Protocol Labs to create CoinList and the SAFT to help US companies legally conduct some ICOs — specifically token presales, which seems to be exactly what the BAT ICO is. Brave Founder, President, and CEO BrendanEich tweeted this morning that “The platform on which the token has utility isn’t up yet, so wait and see.” confirming the tokens have no use today meaning the ICO was a token presale and sold securities. Brave however did not use the SAFT but instead seems to have distributed tokens (securities) to anyone that sent Ether to the specified smart contract address with the specified function signature.

Did Brave act legally under US securities law? There are seemingly three possibilities:

  1. Brave acted legally because the BATs are not securities.
  2. Brave acted legally because BATs are securities and Brave either registered them or sold them via an exemption.
  3. Brave acted illegally and sold unregistered non-exempt securities.

First I explain why BATs are securities. Then I show that a) Brave does not seem to have registered the securities and b) the ICO does not fit into an exemption.

Conclusion: Brave likely acted illegally and sold unregistered non-exempt securities.

Are BATs Securities?

If the BATs are not securities then Brave did not illegally sell unregistered securities. In the United States, the “Howey Test” is the basis of the test to determine if something is a security. Cooley Fintech Lawyer Marco Santoriwrote an excellent article explaining the Howey Test.

Briefly, Howey has three components: “(i) that there is an investment of money; (ii) that the investment is in a common enterprise; and (iii) that buyers expect to profit from the efforts of others.” If an ICO fails any component then it is not a security. In the case of the BAT ICO all prongs are met so it sold securities:

i. Satisfied: “Money” includes Ether which is what was used to pay for tokens in the ICO (See Santori, ‘In fact, the law has progressed to a point where money isn’t strictly required anymore. Today, the test is not whether there was “money” at stake, but whether there was a potential for economic loss for the buyer. As you might imagine, that can come about in a lot of ways.’*1)

ii. Satisfied: See Santori but BATs seem to have “horizontal commonality.”

iii. Satisfied: BrendanEich earlier tweeted “The platform on which the token has utility isn’t up yet, so wait and see.” More details below but in short, the tokens have no utility and thus “buyers expect to profit from the efforts of others.”

Conclusion: Brave sold securities and the ICO was actually a token presale. Read on for details on why Howey (iii) is satisfied. Originally I thought the BAT ICO was selling tokens with utility so it was not selling securities but BrendanEich’s tweets, the BAT White Paper, and the BAT Sale: Terms and Conditions confirm this is not the case.

Current thinking in the industry is that if a token is “live and functioning” (note this is NOT a legal standard but the gist of it seems correct under Howey) that buyers do not “expect to profit from the efforts of others” so Howey (iii) is not met. A) BrendanEich’s tweets and B) the BAT White Paperand BAT Sale: Terms and Conditions confirm the tokens sold in the BAT ICO are not “live and functioning” and in fact have no utility today:

A) BrendanEich’s tweets


This morning at 8:35am, shortly after the ICO completed, BrendanEich tweeted “Yep.” in reply to a tweet of mine citing the above logic for why the BAT ICO was not selling securities. I thought this settled the issue and there was at least a clear (maybe not ultimately correct — need a case/SEC ruling) argument for why Brave was not selling securities.


However, later at 1:12pm BrendanEich tweeted “The platform on which the token has utility isn’t up yet, so wait and see.” Hmm? The Brave CEO stated BATs have no current utility. Sounds like the tokens aren’t “live and functioning” so this ICO is actually a token presale.

B) The BAT White Paper

Page 23 BAT White Paper

BrendanEich’s statement caused me to research the issue more so I turned to the BAT White Paper and found on page 23 that 58% of the ICO funds are going to “rollout of the BAT solution” — sounds like funding development of the platform BrendanEich mentioned above that gives the tokens their utility.

Later on page 25, the White Paper states that funds will be used “by Brave Software to build out the Blockchain-based digital advertising system, which uses BATs as a unit of exchange.” Another statement saying ICO funds will be used to build out the platform that gives the tokens their utility.

This is reiterated in a statement in the BAT Sale: Terms and Conditions document Exhibited A Clause 6 Use of Proceeds from BAT Token Sale section stating: “Technical Development and Staff (estimated 58% of proceeds). This budget item will support Company’s team of over 20 engineers who are developing the Platform and making necessary adjustments to the development of the existing Brave solution and related technology.”

Page 25 BAT White Paper

Were BATs Registered?

Assuming BATs are securities, Brave could legally sell them if they were registered. However, it does not appear Brave registered the BATs. Searching the SEC’s EDGAR database of Company Filings for “brave software” returns no results. Securities lawyers/experts — is there somewhere else to search? Have you found the registration document? Please comment.

Did the BATs Fall Under a Registration Exemption?

Assuming BATs are unregistered securities, Brave could legally sell them via an exemption. It does not seem that the BAT ICO fits an exemption but some possibilities are:

  1. Regulation Crowdfunding: Limited to $1.07M/12 months — doesn’t apply because the ICO raised $35M.
  2. Rule 504: Limited to $1M/12 months — doesn’t apply because the ICO raised $35M.
  3. Rule 505: Limited to $5M/12 months and requires certified financial statements — doesn’t apply because the ICO raised $35M and there were no certified financial statements provided.
  4. Rule 506(b): Prohibits “general solicitation or advertising to market the securities” and requires certified financial statements (same as Rule 505). Unlikely to apply because Brave seems to have used general solicitation and advertising to market the ICO (separate long topic) but more certainly did not provide certified financial statements.
  5. Rule 506(c): Only Accredited Investors and “the company has taken reasonable steps to verify that its investors are accredited investors, which could include reviewing documentation, such as W-2s, tax returns, bank and brokerage statements, credit reports and the like.” Unlikely to apply because the BAT ICO sold tokens to anyone that sent Ether to the smart contract.*2
  6. Foreign Private Issuer (FPI): The ICO was technically not conducted by Brave Software the US corporation but by Brave Software International Ltd. “an exempted company with limited liability incorporated in the Cayman Islands and is not subject to supervision or regulation by the Cayman Islands Monetary Authority” (according to BAT Sale: Terms and Conditions) so perhaps it is an FPI and fits into one of the two Initial Distribution exemptions a) Private and Limited Offering or b) Offshore Sales and Regulation S:
  • a) Private and Limited Offering: 4(a)(2) doesn’t sound like it applies given what appears to be general solicitation and advertising. Also, the Regulation D Rules 504, 505, and 506 “safe harbors” don’t seem to apply as argued above. 4(a)(5) doesn’t apply because the offering was for $35M — more than the maximum $5M .
  • b) Offshore Sales and Regulation S: Probably doesn’t apply because there were seemingly “directed selling efforts” in the United States. Beyond that, it is likely at least one person in the US bought tokens in the ICO and given that Brave distributed tokens to anyone that sent Ether to the smart contract address with the correct properties, it seems hard to argue they could reasonably believe the person was outside the US. See here for a detailed argument of why the similar Ether ICO likely did not fall under Reg S.
mjkDid Brave Raise $35M by Illegally Selling Unregistered Securities?

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