In my almost ten years of covering the industry, I’ve come to realize that if an MLM company tries to convince you they’re not selling securities – then they probably are.
This of course isn’t a hard rule, but it’s generally applicable to the companies that pay lawyers to convince you otherwise.
As far as I’m aware no MLM company with a “we don’t offer securities” legal opinion that has attracted the attention of US authorities, has been cleared of offering unregistered securities.
That’s because the securities law with respect to MLM investment opportunities is pretty clear-cut: MLM + passive ROI = security.
Over the past few years cryptocurrency has emerged as a dominant niche within the MLM industry. What that has sadly lead to is a reboot of dodgy business models, resurrected under the misguided belief that “cryptocurrency = no regulation”.
On one hand it’s not difficult to see how this myth arose, seeing as regulators have taken years to catch up with the cryptocurrency MLM niche.
On the other we’ve seen an uptick of securities regulation in the niche, all but confirming be it cryptocurrency or fiat, a passive ROI in MLM is a security regardless.
Yet there are still companies out there who think they’ve got it worked out, that the law doesn’t apply to them.
Worryingly, despite a number of their colleagues having gone down for rubber-stamping scams, there are also lawyers out there still willing to enable them.
Today we take a look at one such combination, Crypto World Evolution and attorney Scott Warren.
The instigator of this article is marketing claims made by Crypto World Evolution investor Ari Maccabi, which we covered yesterday.
Maccabi, who has strong ties with Crypto World Evolution management, is promoting the company based on it being “fully endorsed by Scott Warren“.
Scott Warren is a named partner in Wellman & Warren, a law firm in California.
In support of his claims Maccabi touts a “legal document” authored by Warren. This document, Maccabi claims, is proof Crypto World Evolution is “100% legit”.
Maccabi is only willing to share the document with potential investors as a marketing tool, however at my request readers were kind enough to supply copies for review.
The cliff-notes? Scott Warren’s legal analysis of Crypto World Evolution is deeply flawed.
The Scott Warren document is dated January 10th, 2018 and titled “Memo issued to CryptoWorld Evolution regarding applicable laws and current
Cryptocurrency issues as applied to the CryptoWorld Evolution business model”.
Warren kicks off his memo by citing a July, 2017, SEC report, which he claims
did not clarify whether cryptocurrency must be registered as a security; simply put, it’s still a maybe.
Why Warren went back so far I can’t say. But literally a month before Warren published his memo SEC Chairman Jay Clayton issued this public statement;
market participants should treat payments and other transactions made in cryptocurrency as if cash were being handed from one party to the other.
With respect to securities law and well before Warren published his flawed memo, the SEC have made it abundantly clear that cryptocurrency is treated the same as cash.
Ignoring this, Warren goes on to position himself as someone working to “counter new regulations” pertaining to cryptocurrency securities offerings.
In order to counter new regulations, the legal profession is turning to the famous Howey Test for guidance.
Bearing in mind the SEC Chairman’s cryptocurrency = cash sentiment, I already covered how Crypto World Evolution met all four prongs of the Howey Test yesterday.
Here’s Scott Warren’s “counter” analysis;
Under the Howey Test, the following four elements must be met in order for an “investment contract” to fall under the definition of a security:
1. Investment of Money
An investment of money may include not only the provision of capital, assets and cash, but also goods, services, or a promissory note.
In other words, the determining factor is whether an investor chose to give up specific consideration in return for a separable financial interest with the characteristics of a security.
This element is generally always fulfilled.
Buyers of cryptocurrency exchange fiat currency backed by a government, such as U.S. dollars, or another cryptocurrency that constitutes a specific consideration.
No argument on the first prong.
2. Common Enterprise
Under the common enterprise element, the courts will look at one of three approaches:
1) horizontal; 2) broad vertical; and 3) strict vertical.
The horizontal method states that a common enterprise exists where multiple investors pool funds into an investment and the profits of each investor correlate with those of the other
Nope, not that one.
The broad vertical commonality approach focuses on the expertise of the promoter.
Nope, not that one either.
The strict vertical commonality approach to evaluating the existence of a common enterprise requires that the investors’ fortunes be “interwoven with and dependent upon the efforts and success of those seeking the investment or of third parties.”
There it is.
In his assessment of the second Howey Test prong, Warren references “horizontal commonality” and completely ignores the other two approaches.
This prong of the Howey test is not met, therefore, CryptoWorld would not be considered a security.
Affiliate returns in Crypto World Evolution, irrespective of how they are paid out, are generated entirely by the company itself.
Under strict vertical commonality, Crypto World Evolution is thus a common enterprise.
Its affiliate investor’s “fortunes” are “dependent upon the efforts and success of Crypto World Evolution, aka. the “third party” “seeking investment”.
Thus Crypto World Evolution constitutes a “third-party” for the purpose of satisfying the Howey Test’s second prong.
3. Expectation of Profits(traditionally prong 3) solely from the efforts of the promoter (traditionally prong 4)
Traditionally, this prong requires that a person “is led to expect profits solely from the efforts of the promoter or a third party.”
This one’s easy.
At the time Scott Warren published his memo, Crypto World Evolution was soliciting investment on the promise of “automated … consistent, significant 24/7 earnings”.
This was so up until a few weeks ago, whereby a shallow attempt as pseudo-compliance saw the company remove that verbiage from their website.
Even then Crypto World Evolution’s business model is still the same. And thus it’s easy to see why Crypto World Evolution has attracted some of the MLM underbelly’s most notorious.
Thankfully, Warren does not contest Crypto World Evolution meets the third prong.
He does however argue the fourth prong isn’t met.
Utilizing the hybrid software product, an individual makes all of their own investment choices and is therefore not dependent on the promoter.
The fourth prong would not be met.
I’m sorry, what?
The involvement of investors in generating a ROI through Crypto World Evolution does not extend beyond a few mouse clicks. This action alone fails to generate a ROI.
The ROI is solely generated via the efforts of Crypto World Evolution, purportedly via a bot they claim to manage and maintain.
Crypto World Evolution investors are given no information about the bot, and are told only that it is capable of generating “automated … consistent, significant 24/7 earnings” (as at the time of Warren’s memo).
Once again ignoring the SEC Chairman’s late 2017 “cryptocurrency = cash” sentiment, Warren claims the third prong’s ‘application to cryptocurrency has yet to be established‘.
However, profits could refer to any type of return or income earned as a result of holding cryptocurrency.
This could come from passive actions such as mining.
Or in the case of Crypto World Evolution, trading. But strangely enough Warren’s memo only mentions mining.
With respect to Crypto World Evolution and the Howey Test, Warren writes;
As stated by the SEC, the Howey Test should be applied to ICOS and any entity dealing with cryptocurrency on a fact-by-fact basis in order to determine whether it should be listed as a security.
He then goes on to assert
- cryptocurrency is not a stock
- cryptocurrency does not fall under the SEC’s technical meanings of a security and
- cryptocurrency does not fall within the definition of a certificate
The devil of course is in the details.
Cryptocurrency in and of itself is not a security, any more than dollar bills in your wallet are.
It’s what an MLM company might do with said dollar bills or a cryptocurrency that creates a securities offering.
In Crypto World Evolution’s case, it’s using cryptocurrency to generate a passive ROI for investors via trading.
The obvious fiat equivalent of this model would be forex. One could set it up the same way, centrally-controlled trading through investor accounts on exchanges.
Thing is though, if that’s what Crypto World Evolution was doing, we wouldn’t even be having this conversation.
Yet because “cryptocurrency”, he we are.
And it’s not as if Scott Warren is a complete moron.
In a stroke reminiscent of classic Gerry Nehra “don’t call an investment an investment” pseudo-compliance, Warren writes
The Automatic product gives me cause for concern in that it takes away the independent judgment of the individual.
As we have previously discussed, having opt out buttons and proper disclaimers should alleviate this problem.
So continue to offer a passive ROI unregistered security, just whack some extra buttons for affiliates to click on and she’ll be right.
The rest of Warren’s memo goes over existing regulatory cases involving cryptocurrency at the time, none of which have anything to do with Crypto World Evolution’s business model (ICOs, mining and token sales).
At first I was willing to write off Warren’s memo as a once-off fail, put together without the knowledge that the month prior the SEC clarified, with respect to securities regulation, that cryptocurrency == cash.
With absolutely no shame however, earlier this month Warren appeared at a Crypto World Event in Thailand – where he posed for happy snaps among some of the MLM industry’s most well-known scammers.
In what is the equivalent of bringing a Martin Luther King book to a KKK rally, that’s Warren’s own “Schemes and Scams” book he’s holding up for the camera.
If the MLM company you’re promoting is primarily made up of US investors but has to hold dinghy events in Thailand, that’s probably a strong signal you’re involved in something you shouldn’t be.
In conclusion, the current model seems to be compliant in the United States.
The SEC appears to be growing much more aggressive, which is understandable with all the fraud taking place via crypto in one
way or another.
They are taking action against several “bad players” in the crypto space.
I think Crypto World Evolution’s unregistered securities offering more than qualifies them as a “bad player” in the MLM crypto space.
Here’s to a prompt regulatory investigation and securities fraud complaint.