change "functional" prong to 'primarily consumptive purposes' prong

[lex-node]

NOTE: this commit is a 'quick fix,' but there may be deeper issues.--For example, it may be better to talk about whether uses of the token are functional/consumptive (instead of whether 'the Network' is functional/consumptive).

The Network could be functional/consumptive but the Token might still not have much of a function or consumptive use on the Network.

Similar points might be made elsewhere re: network vs. token.

[sambacha]

to clarify, you mean consumption similar to that of taking delivery of a commodity at a future date, meaning the underlying transaction purchase is meant for 'usage', correct?

[lex-node]

to clarify, you mean consumption similar to that of taking delivery of a commodity at a future date, meaning the underlying transaction purchase is meant for 'usage', correct?

Not really. By "primarily used for consumptive or other non-investment purposes" I mean to invoke the consumer-use doctrine from the line of cases starting with Housing Foundation, Inc. v. Forman, 421 U.S. 837 (1975), which held that “when a purchaser is motivated primarily or exclusively by a desire to use or consume the item purchased, the securities laws do not apply.”

I added primarily or exclusively as a gloss because the relevant precedents were dealing with cases where both of the following conditions were satisfied:

1. the transaction was clearly almost exclusively motivated by a consumer purpose and
2. material securities-like profits were almost structurally impossible.

For example, the context in which the Forman court held that shares of stock in a condo association were not securities was that:

• the condos could not be acquired without purchasing the stock;
• the stock could not be transferred except together with the condos;
• there was a fixed ratio of shares to each condominium;
• the shares did not confer separate voting rights (instead, the rule was one vote per resident, no matter how many shares held by a resident); and
• the economic upside of the shares was artificially constrained by perpetual transfer restrictions, including a cap on the future sales price.

Teague v. Bakker, 35 F.3d 978 (4th Cir. 1994) had very similar facts (purchasers buying a time-share at a vacation resort), but the mere fact that the time shares were useful was not enough to save them from being deemed securities. Unlike in Forman, there was strong evidence that the motivations of the purchasers were mixed: i.e., in addition to being motivated by the possibility of using the time-shares, the purchasers were also acquiring the time-shares with a view toward profiting from the pumpamentals inherent to the design of the time-share scheme.

[sherlock-shi-x]

LGTM, Meson for safe harbour!

[paulbarclay]

The wording is a little painful to read, but I think this is the right direction to go in - "functional" is likely not strong enough language, as it could allow things that were clear securities to get through a loophole.

[sambacha]

to clarify, you mean consumption similar to that of taking delivery of a commodity at a future date, meaning the underlying transaction purchase is meant for 'usage', correct?

Not really. By "primarily used for consumptive or other non-investment purposes" I mean to invoke the consumer-use doctrine from the line of cases starting with Housing Foundation, Inc. v. Forman, 421 U.S. 837 (1975), which held that “when a purchaser is motivated primarily or exclusively by a desire to use or consume the item purchased, the securities laws do not apply.”

I added primarily or exclusively as a gloss because the relevant precedents were dealing with cases where both of the following conditions were satisfied:

1. the transaction was clearly almost exclusively motivated by a consumer purpose and
2. material securities-like profits were almost structurally impossible.

For example, the context in which the Forman court held that shares of stock in a condo association were not securities was that:

• the condos could not be acquired without purchasing the stock;
• the stock could not be transferred except together with the condos;
• there was a fixed ratio of shares to each condominium;
• the shares did not confer separate voting rights (instead, the rule was one vote per resident, no matter how many shares held by a resident); and
• the economic upside of the shares was artificially constrained by perpetual transfer restrictions, including a cap on the future sales price.

Teague v. Bakker, 35 F.3d 978 (4th Cir. 1994) had very similar facts (purchasers buying a time-share at a vacation resort), but the mere fact that the time shares were useful was not enough to save them from being deemed securities. Unlike in Forman, there was strong evidence that the motivations of the purchasers were mixed: i.e., in addition to being motivated by the possibility of using the time-shares, the purchasers were also acquiring the time-shares with a view toward profiting from the pumpamentals inherent to the design of the time-share scheme.

Non-Investment being functionally equivalent to 'non financial commodity' is where I was drawing that conclusion from. More specifically when an agreement, contract, or transaction would fall within the forward contract exclusions from the “swap” and “future delivery” definitions in the Commodity Exchange Act, See Forward Contracts With Embedded Volumetric Optionality, 79 FR 69073 (Nov. 20, 2014).

However Forwards with Optionality enable cash-settlement of whatever is unavailable to be physically settled. I see now why you bring up Forman, especially the point where, "...the condos could not be acquired without purchasing the stock;", much like consuming a service (a protocol) may not be possible without paying for it ("the protocol's token").

Thanks for the clarification