Carmel, Milazzo & Feil LLP Represents YayYo Inc. (NASDAQ: YAYO) in $10.5 Million Initial Public Offering (IPO)

Press Release – New York, NY – November 18, 2019 –  Securities and corporate law firm Carmel, Milazzo & Feil LLP announced today that it has represented YayYo Inc. (NASDAQ: YAYO), a leading provider of vehicles to the rideshare industry, through its wholly-owned subsidiary, Rideshare Car Rentals, LLC, bridging the gap between rideshare drivers needing a quality vehicle and rideshare companies that depend on attracting and keeping drivers with quality vehicles, in a $10.5 Million Initial Public Offering on the NASDAQ.

YayYo Inc. sold 2,625,000 shares of its common stock at a public offering price of $4.00 per share for gross proceeds of $10.5 million, before deducting offering expenses.

Aegis Capital Corp. and WestPark Capital, Inc. are acting as joint book running managers.

Implications of United States Broker-Dealer Regulations on Securities Tokens Transactions


Security token transactions have become rather common in day-to-day operations with regard to both initial private and public offerings and secondary markets. As a result of the active position of the United States Securities and Exchange Commission (the “SEC”) in setting the regulatory framework for securities offerings by means of distributed ledger technology, blockchain investors and issuers are well-educated (sometimes, in a hard way) about their eminent compliance obligations to either register security tokens or ensure that the relevant transaction falls under an exemption from registration.

Nevertheless, a significant number of market participants whether they are individuals or legal entities remain ambivalent to a less obvious but not less important consequence of trading securities in their tokenized form: namely, the extensive broker-dealer regulations that may be applicable to the activities of said market participants.

It seems that there are two main reasons for such a peripheral status of the matter. First, the topic of broker-dealer regulations in the context of trading security tokens remains novel to some extent, partially, because the SEC has not commenced any newsworthy proceedings to date relating to broker-dealer regulations in the token trade realm. Therefore, the lack of awareness is anticipated. Secondly, the unique nature of the blockchain transactions may actually discourage market participants from registration due to fear of not being able to comply with their reporting obligations and with the best practices standard. Interestingly, the SEC admitted that “the ability of a broker-dealer to comply with aspects of [… the relevant regulations] may not be available or effective in the case of certain digital assets” (Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities). Audacious registered brokers who are willing to commit to the industry are not in abundance.

On the one hand, broker-dealer activity is inevitable in any developed securities market. Thus, numerous individuals and legal entities fulfill the needs of the global communities (with or without second thoughts whether such activity would subject them to the SEC’s jurisdiction). Simply put, in the situation of demand, the supply will commensurate regardless of the license status. On the other hand, the broker-dealer compliance cases may very well become the second “wave” of federal enforcement actions brought by the SEC. Based on the aforesaid, it’s worth choosing an awareness of potential law enforcement risks over prevarication of pointed questions, if and when asked. Consequently, this article is intended to describe some of the aspects of the broker-dealer regulations and the possible implications of the said regulation on the securities tokens market.

Types of Tokens

The instant article addresses solely security tokens. For the purpose of clarification, a token can be deemed a security whether it was intentionally designed to fit within the rubric of securities laws or regarded as such by a regulator based on the Howey test (four-pronged SEC v. W.J. Howey, 328 U.S. 293 (1946) under which an instrument is a security if it relates to (i) an investment of money (ii) in a common enterprise (iii) with a reasonable expectation of profits (iv) to be derived from the entrepreneurial and managerial efforts of others).[1] Standalone cryptocurrency trading or trading of utility tokens may also have consequences related to broker-dealer regulations, but they will not be discussed here.

The International Token Market

Whether it fits the scope of the current U.S. regulations or not, from the very beginning of the use of blockchain technology for the purposes of issuance and trading “tokens of value” (commodities, securities, or cryptocurrencies), the token market was destined and designed for use of the global community. Any exchange or broker would inevitably face the challenge of trading in multiple jurisdictions and dealing with issuers/investors from all over the world.

Additionally, the nature of tokens determines a significant distinction of the blockchain market from a traditional securities market: an issuer needs to create a blockchain platform or use an existing one to issue tokens. As a result, the terms “future tokens” and “simple agreement for future tokens” (SAFT) may very well be treated as distinct securities instruments of the new era: different from options or futures, these tokens represent variations of the unique investment model. Unlike the situation of traditional investment tools, blockchain investors frequently do not receive their tokens instantaneously, rather, the post-investment waiting may take years. Furthermore, an issuance of tokens usually involves the use of ancillary instruments such as cryptographic wallets associated with tokens or other devices that issuers utilize to create and control future marketplace for their security tokens.

As a result, the “future securities tokens” market has developed and actively exists, where initial subscribers are willing to assign their rights to such tokens earlier than tokens are actually issued and become tradable. Whether issuers oppose such practices or not, various agreements and tactics designed to avoid formal non-transferability of future tokens are utilized to arrange the transfer, and profits apparently justify business risks. Said market, since the securities are not registered, is not public. It, nevertheless, exists in the form of communities or clubs, and legal entities that function as “blockchain advisers,” intermediaries, and agents between the potential sellers and potential purchasers of issued or future tokens. The SEC, in its staff statement, drew attention to this matter stating that “an entity that buys, sells, or otherwise transacts or is involved in effecting transactions in digital asset securities for customers or its own account is subject to the federal securities laws, and may be required [my emphasis] to register with the [… SEC and] FINRA.” At this point, the question exists as to how such activity will be interpreted by the SEC, if and when it becomes subject to its review, especially with regard to U.S. entities.

Broker-Dealers. Factors indicating that certain activity may require registration.

Section 15(a)(1) of the Securities Exchange Act of 1934 (the “Exchange Act”) provides that it is unlawful for any broker or dealer to make use of the mails or means or instrumentalities of interstate commerce to effect transactions in any security, or to induce or attempt to induce the purchase or sale of any security [my emphasis], unless that broker or dealer is registered pursuant to the Exchange Act. See 15 U.S.C.A. § 78o (West).[2]

The Exchange Act defines “broker” as “any person engaged in the business of effecting transactions in securities for the account of others.” 15 U.S.C.A. § 78c (West). The term “dealer” is defined to mean “any person engaged in the business of buying and selling securities for his own account,” provided that a person is not in the category “insofar as he buys or sells securities… not as a part of a regular business.[3]” In case law and administrative actions, however, the analysis is usually conducted in a such a manner that a broker and a dealer or a “broker-dealer” is discussed as one category without further classification regarding which definition has been satisfied by the person’s activities.

The list of the activities that may be interpreted as constituting an obligation to register as a broker-dealer can be found on the SEC website and is broad. It includes such examples as finding investors or customers for, making referrals to, or splitting commissions with registered broker-dealers, investment companies (or mutual funds, including hedge funds) or other securities intermediaries, finding investors for “issuers” (entities issuing securities), even in a “consultant” capacity; engaging in, or finding investors for, venture capital or “angel” financings, including private placements; persons that operate or control electronic or other platforms to trade securities; persons that market real-estate investment interests, such as tenancy-in-common interests, that are securities; persons that act as “placement agents” for private placements of securities etc. The factors may be weighted differently, but a commission proportionate to the sale of securities is traditionally considered as one of the strong indicators that tilts the balancing test in favor of the conclusion that the activity is likely to require broker-dealer registration.

Essentially, every issue should be evaluated on an ad hoc basis. In determining whether a particular person falls within the definition of broker-dealer, both the SEC and the courts review the circumstances of the matter from a perspective whether such person is participating in securities transactions “at key points in the chain of distribution.” S.E.C. v. Martino, 255 F. Supp. 2d 268, 283 (S.D.N.Y. 2003) quoting SEC v. Hansen, No. 83 Civ. 3692, 1984 WL 2413, at *10 (S.D.N.Y. Apr. 6, 1984). Although sales-based compensation could be considered as the main “badge” or factor of broker-dealer activity, the “key point” test is extremely flexible and allows to deem an individual or a legal entity as a broker-dealer irrespective to the novelty of the instruments of solicitation or type of securities.

Undoubtedly, certain conclusions can be made based on the existing examples in the SEC’s no-action letters. For instance, the distinction of a broker-dealer from a trader, from the SEC’s point of view, is, inter alia, in the regularity of the subject activity. When a person generally inquires “whether it would be permissible under the federal securities laws… to advertise in an effort to purchase or sell securities for your own account, thereby avoiding use of a broker,” the answer is whether the described activity is engaged in “on a single, isolated basis,” when the registration as broker-dealer is not required, or “is engaged in more often than on a single isolated basis, and if the advertisements encompass offers to buy as well as to sell, broker-dealer registration would be required. Joseph Mcculley Sales, Fed. Sec. L. Rep. P 78,982 (Sept. 1, 1972). Further, there is one peculiar case that may be relevant to the international market of blockchain-based transactions. There, an individual purchasing securities registered with the SEC solely with a registered broker-dealer and further selling them to foreign persons (in Israel) did not require registration as a broker-dealer (although, without an analysis from the SEC whether the factor that the individual intended from a single registered broker-dealer only was relevant). Samuel M. Krieger, 1982 WL 29327, at *1 (July 12, 1982).

It should be additionally noted that the SEC staff has taken and maintained the position that a person who is engaged in the purchase or sale of securities is either a broker-dealer or an associated person. National Ass’n of Sec. Dealers, Inc., SEC No-Action Letter, 1989 WL 246098, Fed. Sec. L. Rep. (CCH) 77,303 (June 18, 1982). “[A] person cannot lawfully engage in the securities business unless he or she is either registered with… [FINRA] as a broker-dealer or as a person associated with a broker-dealer.” Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1573 (9th Cir. 1990).

The implication of the broker-dealer registration requirement on blockchain traders and advisers.

First of all, it is extremely likely that blockchain “advisers,” “experts,” and traders should, at least, consider evaluating their activities as to whether they might be required to register as a broker-dealer. For instance, if a person or an entity can be considered as a “key point” of a token distribution chain, they may face the necessity to register as a broker-dealer.

Secondly, having completed the aforementioned “first step,” an individual or entity may attempt not to subject itself to the U.S. jurisdiction in order to obviate the registration requirements. A lot of unregistered individuals or entities make a decision to “abandon” the United States and function as an offshore entity. Counterintuitively, however, this approach is far from being safe. At the outset, dealing with the U.S. investors by means of interstate commerce automatically subjects persons to the Exchange Act even though a legal entity may be registered abroad: there is no exception for foreign broker-dealers. Further, even exclusion of United States customers from its operations does not automatically release the business having an office in the territory of the United States from the SEC’s jurisdiction. The anti-fraud and consumer protection provisions will still be applicable, and even the registration requirement obligations remain uncertain.

Historically, a registration was not required of broker-dealers when their activities did not involve selling securities to American citizens or residents (See § 1:34. Generally, 15 Broker-Dealer Reg. § 1:34). In fact, the SEC itself in Barons Mortg. Co. of Am. and Intl. Monetary Services, Inc., 1986 WL 67709, at *1 (Aug. 1, 1986) agreed that where securities “will be sold exclusively in foreign countries to non-U.S. residents and non-U.S. citizens” i.e. activities are not involving the US investors, the broker-dealer registration was not necessary. Since then the situation has drastically changed. The Registration Requirements for Foreign Broker-Dealers, 54 FR 30013-01 reads as follows:

the Commission uses an entity approach with respect to registered broker-dealers. Under this approach, if a foreign broker-dealer physically operates a branch in the United States, and thus becomes subject to U.S. registration requirements, the registration requirements and the regulatory system governing U.S. broker-dealers would apply to the entire foreign broker-dealer entity.

To put it simply, the SEC may consider a potential activity of BVI company that trades Swiss-originated securities tokens between China and Singapore, if the BVI company decided that New York is a nice place for its headquarters.

The aforementioned position seems too austere, but it is not likely that an inveterate approach will be easily changed. There is some good news: at least in one instance, solely with regard to the duty to register as a broker-dealer[4] the court found that foreign broker’s failure to be registered in the U.S. was found not actionable when no U.S. investors were involved: “a broker’s failure to register under Section 15(a) of the Act is not actionable in those cases where the ultimate and intended purchase and sale was foreign and thus, itself, outside the scope of the Act.” U.S. S.E.C. v. Benger, 934 F. Supp. 2d 1008, 1013 (N.D. Ill. 2013). Such approach, essentially negating the effect of the SEC’s release addressing foreign-broker dealers was also supported by the Quantum Capital court that straightforwardly called the position “unpersuasive” and agreed with the S.E.C. v. Bengerdecision. See Quantum Capital, LLC v. Banco de los Trabajadores, 1:14-CV-23193-UU, 2015 WL 12259226, at *12 (S.D. Fla. Dec. 22, 2015). The decision as to whether to rely on said case or to stand irresolute seems to be far from obvious. 

Based on the aforesaid, blockchain-oriented businesses should take necessary due diligence steps to make sure that their activities are consistent with the U.S. broker-dealer regulations. Moreover, such notion is relevant not just to the U.S. based entities, but also to registered foreign brokers and international companies with offices in the U.S. It is unclear as to whether the courts will choose the approach of limiting the SEC’s jurisdiction over registration requirements of individuals and legal entities facilitating transactions solely outside of the U.S., as described in S.E.C. v. Benger, or extend the territorial approach beyond the antifraud provisions of the Exchange Act. This uncertainty may raise certain concerns that the U.S. will fall behind other countries in attracting blockchain-related businesses, especially if the allegations about “stonewalling[5]” the broker-dealer applications from companies dealing in crypto assets are justified. It seems, nevertheless, that ultimately, the broker-dealer registration issue is unavoidable and should be preventively addressed by market participates either through a no-action letter or through litigating their own law.

 Kirill Y. Nikonov, Esq. is an attorney at Carmel, Milazzo & Feil LLP

Disclaimer: This article is available for educational purposes only as well as to give readers’ general information and a general understanding of the relevant securities laws, not to provide legal advice of any kind.

[1] Howey test’s prongs were subject to interpretation by numerous court’s decisions, therefore, the reader is respectfully noted that it’s in no event a standalone test. For instance, “investment of money” is also an investment of digital currency (e.g., BTC) or tokens used as money, as interpreted by courts. See Sec. & Exch. Comm’n v. Shavers, No. 4:13-CV-416, 2013 WL 4028182, at *2 (E.D. Tex. Aug. 6, 2013), adhered to on reconsideration, No. 4:13-CV-416, 2014 WL 12622292 (E.D. Tex. Aug. 26, 2014)

[2] The Exchange Act additionally reads: transactions that are exclusively in exempted securities, commercial paper, bankers’ acceptances, or commercial bills do not trigger the registration requirements. This, however, is not applicable to blockchain truncations at this point.

[3] Certain specified exempt activities, such as activities of banks, are not discussed here as irrelevant for the instant article.

[4] An exterritorial approach of the antifraud provisions of Exchange Act are well-established: “in extraterritorial reach of the antifraud provisions… it is clear that Congress “affirmatively and unmistakably” directed that those provisions apply extraterritorially.” Securities and Exch. Commn. v. Scoville, 913 F.3d 1204, 1215 (10th Cir. 2019) Moreover, this aspect of extraterritorial application serves an obvious purpose: avoiding of situations where the masterminds of Ponzi schemes avoid liability by implementing them from the US territory.


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CMF represents WallachBeth Capital in the IPO of Guardion Health Sciences Inc. on to the Nasdaq

NEW YORK, NEW YORK, April 5, 2019 – Carmel, Milazzo & DiChiara LLP represents WallachBeth Capital as underwriter for the IPO of Guardion Health Sciences Inc. (“Guardion”) (Nasdaq: GHSI)

Guardion Health Sciences Inc. (“Guardion”) (Nasdaq:GHSI), an ocular health sciences and technologies company that develops, formulates and distributes condition-specific medical foods and testing technologies supported by evidence-based protocols.

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The Unjustified Fear of Utility Tokens

Raising capital through tokens, whether it’s an investment strategy or a form of “Kickstarter” type sale of future products, is currently not even a novelty. Yet, surprisingly enough, World Blockchain Forum’s panel discussions, the recent publications and blogs, reveal the tendency of abandoning the very idea of utility tokens because of their alleged incompatibility with the United States securities laws. Furthermore, it appears the fear of utility tokens has been formed of somewhat wrongful conclusions and misinterpretation of the perfectly reasonable and anticipated activity of the United States Securities and Exchange Commission (the “SEC”).

Consequently, I would like to contribute to the discussion that a lot of blockchain startups are currently involved: “security vs. utility” token offerings. The stylishly insouciant debate about the advantages and disadvantages of a particular type of token is often accompanied by a false predicate notion or question: which token offering is better, “safer,” or more “fashionable.” Astonishingly, said misconception regarding the approach to choosing the right instrument for financing products or a start-up is fairly common. Ergo, this abstract is a humble attempt to make things clearer without the usage of overly complicated categories.

To begin with, the word “token” is somewhat hyped. It is just a unit of representation. Simple as that, token can be anything (a symbol, a computer code, a tangible object) that is used to represent quantity, quality, or another characteristic. Undeniably, “token” sounds trendy (much more impressive than “a unit” or “a share of common stock”), especially combined with such words as “ledger,” “blockchain,” or “crypto.” Nevertheless, tokenization does not per se mean a creation of a security or commodity (and overall, doesn’t give any additional meaning to the object of tokenization). Certainly, a token may become a security if it is used as such. Various types of token offerings allow entrepreneurs to sell different digital assets to general public: in the form of cryptocurrencies (just a measure of exchange), in the form of a key or access codes to certain goods or services, or in the form of an investment in the issuing company. Each category of tokens determines a completely different marketing strategy, the behavior of the issuer, and has distinct legal and financial consequences.

Since tokenized offerings of any form are fairly new to the regulatory bodies, they justifiably received a considerable amount of attention, including the quick reaction of the SEC. The recent outbreak of SEC scrutiny (which is well-justified in light of the necessity to protect investors) lead some “crypto-attorneys” and “experts” to a conclusion that any tokens are securities, and that the offerings should be structured accordingly.

Simply put, a mere usage of a term out of ordinary parlance does not create a security. In order to illustrate that it’s not just my position, I would like to quote one of the very recent federal court decisions showing that the analysis of the offering goes far beyond answering the question of whether it uses the words “token” or “coin”: “[m]erely writing “Blockvest” or “coins” on their checks is not sufficient to demonstrate what promotional materials or economic inducements these purchasers were presented with prior to their investments. Securities and Exchange Commission, Pl., v. Blockvest, Llc and Reginald Buddy Ringgold, III a/k/a Rasool Abdul Rahim el, defendants, 18-CV-2287-GPB(BLM), 2018 WL 6181408, at *8 (S.D. Cal. Nov. 27, 2018).

It is abundantly clear that neither issuers nor investors should presume that a token is some kind of magic word that turns an asset into a security. No, it doesn’t: again, a token may be a security depending on the offering strategy. The fear that the utility token is actually a security under U.S. law or in accordance with the SEC’s policies might be emotionally justified, but lacks legal or logical foundation. Furthermore, the SEC itself merely pointed out that new technological solutions in the areas of crowdfunding will not allow circumvention of federal securities laws: “the automation of certain functions… does not remove conduct from the purview of the U.S. federal securities laws.” (See Overall, the SEC did not declare all tokens to be securities, and even, arguendo, if it had, such onerous position, I believe, would be overturned by the courts.

Digging a little further down, the creation of consumable tokens designed purely for facilitating goods or services within a given network is not likely to be deemed a solicitation of securities. It is worth mentioning, that the main argument of the proponents of such an idea comes with the so-called “economic realities” of the offering, when purchasers of the tokens buy them just because they can later re-sell them for a higher price. Even when this is actually the case, this is neither what the law (the Howey test and related case law – which I will discuss it in future publications in detail) provides, nor does this idea reflect what the reality should be. Admittedly, a significant portion of customers may elect to purchase utility tokens of an issuing company not to avail themselves of the product, but in a hope of profiting on resale. It’s not worth speculating on why people are doing so, and whether this is a new “economic reality.” The fact remains that unless a new regulation is issued specifically for tokens or if there is a new test adobted by the Supreme Court (for instance, the Court elected to do so in case of promissory notes in Revs v. Ernst & Young, 110 S. Ct. 945 (1990)), the current position that a customer’s or market’s behavior is the determinative factor to turn a token into a security is somewhat ridiculous.

To prove the point, I will present a situation without tokens. If a video game company is selling end-user licenses in the form of an access code or a key for a future game with some special content (for instance, in-game items giving multiple bonuses to an RPG character), a fraction of consumers may be motivated to buy a license, not to play the game, but rather to resell the access key later (if the game is a great success, and the items offered are limited). I hope that the described presale does not lead the reader to the conclusion that the company is offering securities. The analysis should not change when the video game company decides to offer tokens instead of the license keys/codes.

Likewise, “forever” stamps of the United States Postal Service can be purchased because a consumer plans to resell it for a profit. The demand for the stamps here is not relevant for the analysis as to whether stamps are a security. An analogous situation may be observed with the purchase and resale of tickets for various events when particular customers purchase the tickets with intent of resale at a higher price. As per my best knowledge, no one has ever tried to investigate whether “forever” stamps or Comic-Con tickets are securities (hopefully, not just because they are not distributed through a blockchain system). Hence, it seems that an idea that the magic word “token” is able to convert a commodity into security is, to put it softly, naive.

Undeniably, the situation when “utility” tokens are created to circumvent securities laws and are de facto securities should be distinguished from the aforementioned analysis. In this regard, tokens are not the first instrument that might be used to disguise the true nature of the legal relationship of the parties – in already mentioned Howey, the U.S. Supreme Court dealt with real estate contracts for ownership parcels of land with citrus groves in connection with leases and service contracts. Therefore, any civil or criminal consequences for issuers of “utility tokens” that chose to disregard the U.S. securities laws are not the indication of any drawbacks of utility tokens. Rather, it’s an indication that one is not allowed to present securities as “utility tokens,” thus, no surprises here. Finally, it should be added that the ICO-boom of the year 2017 and the common lag between the phenomenon and the regulator’s reaction to it created an illusion that a public offering of securities through utility tokens was allowed before. In reality, such practices have never been allowed, but it takes time for governmental authorities to analyze a relatively new concept and to adequately react.

Sadly, a great number of attorneys choose to force clients to regard any tokens as securities for the purpose of “safety” and avoid regulatory scrutiny, instead of giving a thorough analysis of the projects: some start-ups may find it beneficial to utilize security tokens, others may need to go with utility tokens or even use both utility and security tokens for a different purpose. In fact, it may be extremely detrimental for an issuer to present what is, in reality, a utility token as a security.

Overall, the popularity of blockchain technology and tokens, together with its rapid development, created an illusion that initial token offerings are a novelty that exists in a legal vacuum, and the regulator’s time lag to respond strengthened such an impression. When the imminent happened and the SEC adequately reacted to intentional or negligent cases of violations of securities laws, the feedback of the community turned out to be blaming the SEC or utilities tokens an instrument. But at the end of the day, no matter how emotional it gets, utility tokens remain a viable instrument, if used properly.

Kirill Nikonov, Esq. is an attorney at Carmel, Milazzo & Feil LLP.


This article is available for educational purposes only as well as to give readers general information and a general understanding of the relevant securities laws, not to provide legal advice of any kind.