The purchase of the cards is not engaging in a common enterprise with the Pokemon show and the efforts of others aren't the cause of the rise in prices.
If not for the show, the cards wouldn’t be worth as much. The show is what is spreading the memes and driving the demand for show related merchandise. That IS the business model!
It sounds like your whole defense would hinge on hoping the SEC won’t be able to convince a court that it’s a common enterprise. I looked it up and “common enterprise” is not very well defined in either statutory law nor case law. I have been over this with many people and made them realize that you can’t possibly predict “this isn’t a common enterprise” defense would work in a court or law. SEC has argued many novel concepts, just this year with LBRY for instance. And they were successful. If they want to say it was a common enterprise, and the term is not even well defined, then they will make a strong case. It’s not up to you reading your own opinions into definitions, it’s whether a judge or jury makes a decision in a case, and / or whether the SEC exercises their restraint.
> The show is what is spreading the memes and driving the demand for show related merchandise. That IS the business model!
I'm actually not sure how true this is. Given that there are non-pokemon examples (like magic: the gathering) that don't have cross-branding, and there exists a competitive pokemon TCG scene independent of the show, and the cards maintain a secondary market value as long as people want to play kitchen-table or collect them as collectibles, which will be true independent of the success of the Pokemon company, the common enterprise thing falls apart.
I don't purchase pokemon cards as an investment in The Pokemon Company^tm with the expectation of profit. I purchase them as a toy to entertain me. That fails prong two and three.
That a secondary market exists, and that particular objects have a high secondary-market value doesn't make the whole thing a common enterprise for profit, and I really doubt the majority of pokemon card purchasers do so with the intent to profit, same with MTG. Most people want some cool cards and entertainment, and throw them away.
(And this is backed up by data: with MTG, which has astronomically higher demand and card prices than pokemon, their market research shows that, by far, their largest consumer segment is entirely casual players who never attend sanctioned events. They buy packs or precons. So concepts like the secondary market value are immaterial for the majority of the consumers)
Sorry but it's not about what you do. Even if it fails prong 2 and 3 for you, the SEC can still successfully argue that the vast majority of sales are securities.
This was the dangerous precedent set in their victory over LBRY in December 2022. They argued that if at least some people bought the utility tokens with expectation of profit, then the utility token sales were securities -- and the judge bought it!
LBRY's arguments sound like yours: LBRY argued in support of its motion for summary judgment that LBC coins are not securities because (1) they are consumptive in nature, with purchasers using LBC for on-chain activities rather than investment purposes; (2) the “primary focus” of LBRY’s promotional statements and materials was the utility of LBC, not its potential price appreciation; and (3) LBRY stated explicitly in marketing materials that LBC was intended for consumption on the LBRY network, not as an investment.
The court also rejected LBRY’s argument that the purchase of LBC for consumptive, and not speculative, use by some of its buyers suggests that LBC is not a security for any of its buyers. The court suggested that the intended use of the token by a subset of LBC purchasers was of limited relevance to the overall analysis, which ultimately indicated that LBC was a security under the Securities Act.10
But this is where judges come in, who can analyze things like real world intent. And stuff like "At launch, LBRY retained 400 million LBC for its own use" doesn't to me imply that these things are the same. TCGs do not function like securities. If I am a securities issuer, I make money primarily when the security goes up in value. If I am a TCG producer, I make money when people buy more of the product, irrespective of the value of it. The goal of a securities issuer is to, over time, inflate the value of the security. The goal of the TCG issuer is to reduce the value of the cards (on the secondary market) by producing more of them.
Konami stock goes the more blue-eyes white dragons are printed. That isn't true for LBRY, and that's what the "common enterprise" bit is about. Hasbro and Konami and the Pokemon company aren't keeping a stockpile of additional secret super valuable cards to go up in value over time, because they aren't securities and they don't act like securities, and the companies will just print more of them if they want to. But that isn't true for LBRY when they keep a hold of the asset they create and bet on its value increasing over time!
And of course this is why we have judges. They can look at the evidence and see that The vast majority of LBRY investors were investing with a profit expectation, LBRY was treating the token as an investment that people could use to profit from the platform's success, etc. The difference is that with LBRY, people treating it as a security was the norm, but with TCGs, treating it as a security is done only by exceptional investors, and the companies don't condone it, even tacitly[0]. And the actual filings in the case make that abundantly clear. You don't have the CEO of Hasbro or Konami or The Pokemon Company releasing press releases about the market value of cards.
Like in the past I'd seen some of these arguments and been somewhat convinced (especially around the whole secondary-market and tax issues), but this feels really cut and dry.
[0]: (except perhaps with MTG's reserved list, but that still fails due to condition 2 above, Hasbro/Wizards and the "investors" in the Reserved list cards have different interests. They aren't invested in a common enterprise. Wizards would love, I mean absolutely adore reprinting reserved list cards, and they try all the time in sneaky ways (silver or gold border, near-functional reprints, digital versions, etc.) because reprinting those is good for the company. What it is bad for is investors in the cards. Those are distinct incentives, not a common enterprise, not a security.
So it's clearly not horizontal, right, and your argument is that there is a vertical common enterprise?
I don't think it's all that poorly defined, but either way, for a vertical the 11th circuit required that you must "show that the investors are dependent upon the expertise or efforts of the investment promoter for their returns."
That's just not the case here. The show could end completely and "investors" (I don't think they are investors, either, but I'll go with you on this) continue to see returns.
You've also got issues of control over the cards and the fact that people purchase them without intending to profit from them, both of which strike against you.
Just because a show could hypothetically end and the assets would go up, may not be a convincing argument. Hypotheticals could go either way.
One company owns the IP, the rights to the characters, to produce shows, they have the expertise, and it is exactly the show and the brand that drives the demand for merchandise sales. This is well established. They advertise the merchandise.
Now, without the advertisement, there could remain a niche group of people who would pay a lot for collectibles, but nowhere near the amount of people or capital under their management than during the heyday of the show actually airing and constantly making the memes (pokemon, yu gi oh, whatever) relevant and driving demand.
By your argument, LBRY the company could fold and people would continue to use LBRY tokens. Which is exactly what happened. So does that mean it wasn’t securities sales after all?
As for the other issues you mentioned, the court explicitly stated that just because some people buy the cards for consumptive use doesn’t mean they all do. You could buy 100 tickets to a ball game, but intend to only take your family, and scalp the rest. One of the criteria for a securities sale is did you buy more than you could ever conceivably use? And if you keep the cards in mint condition unopened that’s pretty much textbook definition of investing into collectables. Then the only question us how much are you relying on the expertise of the company producing Yu Gi Oh content to… continue to produce Yu Gi Oh and keep it relevant.
Now, if Yu Gi Oh was in the public domain and lots of entities could keep the memes going, sure. It would be super decentralized (although a strict reading by the SEC could nevertheless see a “common enterprise” horizontally across all of them, much as they are considering now for Ethereum!)
But since all these initiatives (Teenage Mutant Ninja Turtles, the music and movie industries etc.) work off massively relying on copyright protections, so they are the ONLY ones authorized to use / license the characters, then yeah you’re kind of relying on the efforts of a third party promoter to make sure a lot of people give a crap about your mint condition charazard collectibles!
Do the following thought experiment … if some group were selling the same exact type of trading cards in the form of NFTs, and creating Telegram channels to promote them, creating all kinds of episodes featuring those characters, are they a “common enterprise”?
>By your argument, LBRY the company could fold and people would continue to use LBRY tokens. Which is exactly what happened. So does that mean it wasn’t securities sales after all?
No, my argument is that the performance of the show is not directly linked to the price of the cards, among other things. LBC did not have continuing returns after the announcement that they were folding, and the theoretical use of the coins outside of investing is gone with the company. There's also the fact that there is no contract or common enterprise between purchasers of the cards and the makers of the Pokemon television series.
LBRY had other functions that made the coins look more like securities. For example, they used LBC as security for debt, they promoted it as an investment opportunity, they acknowledged its growth aligned with their company and they encouraged people to hold on to the coins so that they would appreciate in value despite new issuances. The entirety of the value of the coin was based on the performance of the company.
> the court explicitly stated that just because some people buy the cards for consumptive use doesn’t mean they all do.
Sure. Most people buy the cards for consumptive use, though. It's not a small number. Some people do invest in them as collectibles, but that doesn't make them a security.
> if some group were selling the same exact type of trading cards in the form of NFTs, and creating Telegram channels to promote them, creating all kinds of episodes featuring those characters, are they a “common enterprise?"
Do you mean the group that made them, sold them and promoted them? Sure - if a group of people made some products, marketed and sold them together then they would likely be acting in common enterprise. It could be a partnership, especially if they pooled their sales. That's not really what is happening with Pokemon cards, though. I'm not arguing that The Pokemon Company or Nintendo can't issue securities, I'm just saying the products they make and sell for consumptive purposes are not in themselves securities.
> and the theoretical use of the coins outside of investing is gone with the company
Gone? Theoretical? LBRY has been and continues to be one of the most—used utility tokens out there. The tokens are used in a decentralized network to pay for streaming video. That’s the whole point — if the company has folded but the network continues then that proves there was a strong utility case.
I am saying that just because there is utility doesn’t mean many of the sales weren’t also securities transactions. And the same goes for Yu Gi Oh. It doesn’t matter if there is a direct link with the price of the cards. When Yu Gi Oh is off the air and no one is advertising the toys and cards, are you really going to tell me demand will be unaffected? Children grow out of the toys, and new children will be marketed toys by OTHER groups that rise up after Yu Gi Oh. To say their efforts, expertise, advertising etc have no link to the demand for toys is a very dubious argument, some might even consider it preposterous.
> if a group of people made some products, marketed and sold them together then they would likely be acting in common enterprise
That was the prong of the Howey test that we were discussing. You claimed that there was no common enterprise with Pokemon. Yet the company behind Pokemon did all those things you mentioned — and it is in fact the exclusive rights holder to the IP, so no decentralized ecosystem can even legally rise up to dilute this common enterprise. That is how ALL of these media + merchandising plays work.
Finally, using assets as security / collateral for debt doesn’t mean that the assets are investment contracts. I could use lots of commodities and other assets as collateral for debt. They could even be pegged to the dollar, and still be worth a dollar. USDT for instance could hardly be considered an investment contract, right?
>When Yu Gi Oh is off the air and no one is advertising the toys and cards, are you really going to tell me demand will be unaffected? Children grow out of the toys, and new children will be marketed toys by OTHER groups that rise up after Yu Gi Oh. To say their efforts, expertise, advertising etc have no link to the demand for toys is a very dubious argument, some might even consider it preposterous.
I am actually saying that, yes - the value doesn't come from the current show, it comes from nostalgia, rarity and the drive to collect things. I'd bet that most people with Pokemon card collections, for example, do not currently watch the cartoon series.
>Yet the company behind Pokemon did all those things you mentioned — and it is in fact the exclusive rights holder to the IP
Yes, Nintendo, the Pokemon Company and its shareholders are engaged in common enterprise. Purchasers of Pokemon cards are not.
>Finally, using assets as security / collateral for debt doesn’t mean that the assets are investment contracts.
I didn't say it did. It was part of the argument that the company believed the coins had appreciating value. What about the rest of it? "promoted it as an investment opportunity, they acknowledged its growth aligned with their company and they encouraged people to hold on to the coins so that they would appreciate in value despite new issuances." Does the Pokemon Company do that?
So now you are claiming that people’s nostalgia drives the sales today now that the shows are (temporarily) off the air. And therefore it is not a security. And also the original sales while the shows were running were never a securities transaction.
I am not sure I buy that argument about the original sales of securiries, and the SEC and judge in the court might not either. In fact, the LBRY and Ripple cases both have the judges saying secondary sales later on are not securities transactions in the crypto case also, but the issue is whether the original ones were.
Because the nostalgia is only widespread BECAUSE of the efforts of Pokemon to promote their IP, including getting the TV show syndicated, telling the kids to “gotta catch en all”, so now when the kids grew up, they have nostalgia. And also the cards (some of which were explicitly bought for investment purposes and their rarity, like the rare / limited edition charizard or the rare Yu Gi Oh Exodia combination etc) are in circulation through an “ICO” - an initial card offering and subsequent offerings haha. At the time they were conducted, the “investors” were totally relying on the efforts of the IP holders to promote the cards and make the rare ones worth something, or combinations or collections worth something. So at that time they might have been buying an investment contract. Again, I am simply applying the SEC’s currently MADE arguments in the LBRY and Ripple cases, to trading cards!
By analogy, if a crypto company today sells NFTs with different properties and emphasizes their use only in battle, yet also has rare special edition NFTs, promotes them online for years through Telegram channels and metaverse ganes etc. then you’re claiming the SEC cannot prove any of those rare NFTs were purchased relying on the efforts of the promoter to make the game’s network effect grow to such an extent that it would increase the demand for the rare NFTs, even after the promotion efforts ended. The form of whether it’s a trading card or crypto shouldn’t matter, only the facts and circumstances matter.
And if a new TMNT movie comes out then sure, you could again claim that all the action figures and cards being sold are for consumptive use only. But the LBRY case explicitly said that there could have been people buying it for INVESTMENT purposes and therefore it sets a scary precedent for the crypto industry, that, if applied to those industries would make Pokemon and Yu Gi Oh cards just as much securities sales for that same reason. But SEC didnt take them to court or make arguments like that, because it exercised its discretion to not bring suit. That’s what government agencies do. When Obama said he would direct ICE to deprioritize DACA cases, that’s what he was talking about. Or when police see a Police Benevolent Association card for a minor offense. The government selectively enforcing things is common.
> Does the Pokemon Company do that?
You mean the company that puts the phrase “gotta catch em all!” everywhere including its shows and jingles? It certainly encourages “collecting them all”. This is what happens when you do:
> LBRY had other functions that made the coins look more like securities. For example, they used LBC as security for debt
======= DIFFERENT QUESTIONS
Just out of curiosity, if you still think the original sales are not securities, would you also be just as optimistic with regard to allowing the people to play games and do battles on a smart contract to win actual ETH? Would this violate the FTC’s restrictions on lotteries? Would you say it is a lottery because there is an element of chance when you get a random card? Or a game of skill because a karebo used properly can defeat a blue eyes white dragon? And is a company putting up prize money on the blockchain enough to satisfy the bonding requirements if it is a contest / game of skill instead of a game of chance?
And how about deploying a smart contract allowing people to wager ETH and then have it go to one or more winners based on some on-chain battles or rules which are primarily based on skill? (Nevermind that an AI could trivially try all the combinations to give an unfair advantage).
