I woke up in a cold sweat. I couldn't remember if the beavers were securities.
And it's all because of the FT's Jemima Kelly.
She wrote a piece on MicroStrategy's recently announced shelf offering of equity, the proceeds of which were plowed into bitcoin:
MicroStrategy triples down on bitcoin
And I wondered if there was a (very) dirty hedge in buying bitcoin and shorting MSTR.
Which led to the Investment Company Act of 1940: had MicroStrategy become an "inadvertent investment company" subject to the '40 act?
And that led to the essence of the question: Is bitcoin a security? If the answer is yes then MSTR is an investment company as defined and subject to much more onerous reporting and registration requirements and would probably have to do a rescission offer on the bonds and the stock sale.
And all this thinking had me nodding at the keyboard. And then sleep. And then dreams.
First the Howey test, the SEC's quick and dirty way to determine if something is a security.
And then Weaver's Beavers, one of the early cases on what is and isn't a security.
And in my dream I couldn't remember if the beavers are securities. And then I woke up.
Go read Jemima's reporting and I will head down to the link-vault to find an answer.
I'll be here when you get back.
*****
While you were gone we blew the dust off of 2017's What Is A Security? The SEC and ICO's, Crypto, the Weaver's Beaver Case and Rule 10B-5
SEC Announces Enforcement Initiatives to Combat Cyber-Based Threats and Protect Retail Investors https://t.co/hLUg81cyzN
— Izabella Kaminska (@izakaminska) September 26, 2017
How dare they?
Well, it goes back to a bunch of beavers and 445 F. 2d 76 - Kemmerer v. ML Weaver.
Via Preston Byrne's Back of the Envelope blog:
Beaver Fever
The beaver case was the big one.
The beaver case was a case called SEC versus Weaver’s Beaver Association. One defendant appealed to the U.S. Supreme Court, which denied cert. A fellow in the Salt Lake area started a company called Weaver’s Beaver Association. They sold pairs of beaver, all over the United States and in foreign countries. These were purportedly domesticated beaver. You would buy a pair of beaver for several thousand dollars, and these beaver would have little beavers, called kits. Then these little kits would grow up, and they’d have more kits. And you would end up with this large herd of beaver. The beaver were to be sold to other purchasers. They had a marketing arm, where they would sell your pairs of beaver. There was going to be a tremendous demand for beaver pelts in coats, beaver hats, and everything—it’s coming back. So they sold millions and millions of dollars of these beaver. The salesmen represented that you could take possession of your beaver, and you can raise them in your own backyard, but if you don’t have the capabilities, we have beaver ranches all through the West—Montana, Wyoming, et cetera.
At these beaver ranches we have little pens for each pair of beaver, they have nesting boxes, they have little swimming pools, and they’re fed a special diet. We’ll take care of your beaver for you for a hundred and fifty or a hundred seventy-five dollars per beaver per year, until you can sell it. Nobody could take care of beaver; you can’t put it in your bathtub. The purchasers would have to leave the beaver on the ranches. What happened was that all these beaver and their kits that was being sold to people could not be re-sold, because the Association was too busy selling their own beaver to take time to sell your beaver.
So these people ended up with a large number of beaver, and they’re paying all these ranching fees. It was just a disaster. They really weren’t selling domesticated beaver; instead they were flying the beaver down from Canada and purchasing them from trappers in Canada at approximately twenty dollars a beaver. They’d fly them into Salt Lake, put tattoos in their back foot, in the web, and start selling them. They’d sell them for three thousand a pair and up.
…What happened was: all the congressmen started leaning on the SEC. “What are you doing? You know, suing people that raise animals.” The SEC position was that it was an investment contract. You put your money in, you bought the beaver, they kept the beaver; they raised the beaver, they were to sell the beaver, and all the profits were supposed to come from a third person. The courts had no trouble finding an investment contract, and the Supreme Court denied cert. The SEC got a tremendous amount of pressure from the public. Hamer Budge came out to Denver in the middle of the case. I was in the office one day and he walked in and asked me if we have any more animal cases out here? I said, “No. We have no more animal cases. ” I learned a lesson then. I’ll go back to the more traditional securities frauds.
H/T to Peter van Valkenburgh for sending this my way. This interview is possibly the funniest securities law-related document I’ve ever read.Here's Open Jurist with the judgement of the 7th Circuit Court of Appeals:
Read the whole thing.
Harold KEMMERER et al., Plaintiffs-Appellees,
v.
Mark L. WEAVER et al., Defendants-Appellants.
1 This suit was brought under the Securities and Exchange Act of 1933 (Title 15 U.S.C. 77a et seq.) and the Securities and Exchange Act of 1934 (Title 15 U.S.C. 78j) and Rule 10B-5 promulgated pursuant thereto (17 C.F.R. 240.10B-5). Plaintiffs claimed defendants offered for sale certain investment contracts wherein there was not a full, complete and fair disclosure of all the material facts.
4 The trial court made findings of fact and conclusions of law and entered judgment holding that the Beaver contracts were investment contracts as defined by Section 3(a)(10) of the Securities and Exchange Act of 1934, and that material misrepresentations and omissions of fact were made in the sale of these securities to plaintiffs.
6 The record herein is voluminous consisting of five volumes of transcript plus many exhibits. A summary discloses that the Weavers' Beaver Association was organized as a Utah non-profit agricultural cooperative in 1957. Until late in 1964, the Weaver family had a majority of the directors of the Association. The Court dismissed this Association for lack of jurisdiction in that service of process had never been obtained. The trial court also found that defendant, American-Canadian Beaver Co., Inc., had no liability to plaintiffs and held that the individual appellants were the controlling persons of Weavers' Beaver Association.
7 The investment contracts were for the sale, care and resale of domestic breeding beaver which were claimed to have a large value in the fur industry. Defendants sold these beaver to plaintiffs and others for prices up to $1200 each, representing that they were seventh generation domestic beaver, and further, representing that there existed a ready market for the resale of these animals.
9 Instead of selling exclusively domestic beaver, defendants actually sold to plaintiffs and others, certain wild-trapped beaver which ranged in actual market value of from $20 to $75 each. Furthermore, there was no immediate market for resale as had been promised by defendants. Many purchasers were placed upon a one-year waiting list.
10 The appellants claim that there are four principal issues on this appeal: 1) Can defendants be charged with liability as controlling persons? 2) Is Lawrence Milligan a controlling person? 3) Is the sale of live beaver under the contracts a 'security' under the Act of 1934? and 4) Were there material misrepresentations? Appellants contend that all of these question should be answered in the negative. We disagree on all four points....
So it appears that under current interpretation bitcoin is not a security and we won't get a bang out of the pair-trade by reporting MSTR.
On the other hand MSTR is priced at almost double the value of the underlying BTC so there is a trade if one thinks the prices will converge on their own.
