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The Howey Test + More tech layoffs
A quick fix of the latest financial happenings.
Good morning, investors!
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Without further ado…
One Test That Could Derail Crypto — or Protect It
William John Howey knew a thing or two about investments. Although he bounced between careers in his 20s, he had a knack for real estate development and salesmanship. The Illinois native eventually moved to Lake County, Florida, where he acquired 60,000 acres of land between 1914 and 1920. He proceeded to plant citrus groves.
It turned out to be a wise move.
The land cost him between $8 and $10 an acre, and he would later sell his groves at $800 to $2,000 an acre. With each parcel sale, Howey would offer a maintenance and development contract to the investor — in exchange for a fee, Howey not only continued to oversee the investor’s groves but also guaranteed full recoupment of their investment plus 6% interest.
Howey even went as far as to say an investment in his groves was safer than bonds.
What does any of this have to do with crypto?
Well, in 1946, eight years after Howey’s death, the Supreme Court ruled that Howey’s maintenance contracts, which were akin to leaseback arrangements, qualified as investment contracts; therefore, they should have been treated as “securities” and subject to the SEC’s oversight and regulations.
This ruling established the “Howey Test,” which outlines a four-pronged assessment that determines whether a transaction qualifies as an investment contract and falls under the SEC’s purview:
An investment of money,
in a common enterprise,
with a reasonable expectation of profit,
to be derived from the efforts of others.
In case the synapses aren’t firing on all cylinders yet this morning, one could make a case that many cryptocurrencies (but not all) meet this definition of “security.” Why does it matter? Beyond contradicting the very nature of decentralization, SEC regulation would mean much more stringent reporting requirements and more hoops to jump through for new listings/offerings.
While crypto’s identity as a security is still widely debated, that hasn’t stopped the SEC from ramping up enforcement efforts over the last few years.
In September 2020, a federal district court ruled that Kik Interactive — which raised almost $100 million via an issuance of digital “Kin” tokens to build a Kin Ecosystem — met the Howey test and offered unregistered securities.
In December 2020, the SEC filed an action against Ripple Labs, creator of the crypto XRP, arguing the same premise — the company failed to register its coins as securities. This case is ongoing.
In February 2022, the SEC issued a cease-and-desist order to BlockFi, alleging that the crypto platform’s interest-bearing accounts, which provided variable rate returns to investors based on the company’s deployment of the investors’ crypto capital, represented investment contracts. BlockFi and the SEC reached a $100 million settlement.
Most recently, the SEC launched an investigation into Coinbase — one of the world’s largest crypto exchanges — to determine whether it’s allowing investors to trade nine digital assets that should be regulated as securities. Of course, Coinbase vehemently denied the idea of listing securities on its platform.
The findings would have wide-sweeping ramifications if it is eventually ruled that Coinbase enables the exchange of securities versus digital property and otherwise unique assets. The same can be said if crypto wins this particular battle, potentially insulating many cryptos from further SEC actions.
Two More Tech Companies Turn to Layoffs: SHOP and FB
On Tuesday, Shopify SHOP 0.00%↑ announced that it was laying off roughly 1,000 people or about 10% of its workforce. In a letter to Shopify employees, Tobi Lütke, CEO of Shopify, said he overestimated the growth of ecommerce:
We bet that the channel mix — the share of dollars that travel through ecommerce rather than physical retail — would permanently leap ahead by 5 or even 10 years. We couldn’t know for sure at the time, but we knew that if there was a chance that this was true, we would have to expand the company to match.
It’s now clear that bet didn’t pay off.
It’s been a tough 12 months for Mark Zuckerberg and Facebook. Shares of the OG social media platform’s parent company, Meta Platforms META 0.00%↑ , are now down 5.25% from five years ago. And after a weak quarter in which Meta fell short of revenue, earnings, and KPI guidance, now Zuck and co plan to do more with less. Here’s his commentary from earnings call with analysts, emboldened for emhpasis:
Our plan is to steadily reduce headcount growth over the next year. Many teams are going to shrink so we can shift energy to other areas, and I wanted to give our leaders the ability to decide within their teams where to double down, where to backfill attrition, and where to restructure teams while minimizing thrash to the long term initiatives. The fact that we hired a lot of people earlier this year means that our reported year-over-year headcount growth will still be substantial for the next few quarters, but it should continue to decline over time.
This is a period that demands more intensity, and I expect us to get more done with fewer resources. We're currently going through the process of increasing the goals for many of our efforts. Previously challenging periods have been transformational for our company and helped us develop our next generation of leaders. I expect this period to be no different. I expect we'll find a way to keep investing in our top priority areas, and I think we're going to come through this period as a stronger and more disciplined organization.
Three Eye-Opening Tweets
And finally, we close with three eye-opening tweets.
What goes up, must come back down (hopefully).
Unofficially, yes. Officially, no.
Hats off to the analyst who produced this wordplay gem. (RIP McPlant)
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