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Tags: Cryptocurrency, Crypto, Bitcoin, Ethereum, Blockchain

An analysis of the Elepig project: security vs. utility

Many investors are hesitant to invest in Initial Coin Offerings and Token Offerings because they are unsure whether such investments might fall under US Securities laws, rules and governance.

Fortunately there is a relatively simple test that can be applied to any project to determine the likely classification of a token (security or utility). Crypto may feel bleeding-edge at times, but the Howey test is nothing new. In fact, it has existed since 1946 when it was applied by the US Supreme Court to Howey orange grove investments in Florida.

Serious crypto projects will proactively complete the Howey test and publish the results publicly, which is the purpose of this article for the Elepig project.

TLDR: Elepig is UNLIKELY to be deemed a security, as per the well-regarded and long-established Howey test

Element 1 concerns any potential investment of money.

Q1.1 Is there an investment of money?

This is a straightforward yes/no test. Elepig will be selling tokens in exchange for value (Ethereum) in a crowdsale, this is clear-cut.

Score for Question 1.1 = 100

Score for Element 1 = 100

Element 2 is referred to as “Common Enterprise” and it seeks to determine the level of independence and autonomy that a token holder may seek to profit from, regardless of the actions of other holders and the project.

Q2.1 What is the timing of the sale?

Elepig’s crowdsale will occur when a test network (Exchange) is operational. If there is a functioning network there is less likely to be a common enterprise where the profits arise from the efforts of others. The closer the sale is to launch of the network, the less likely there is to be a common enterprise. Importantly, Elepig tokens can only be bought and sold on the Elepig Exchange, so there it is extremely implausible that a common enterprise could occur.

Q2.2 What do token holders have to do in order to get economic benefits from the network?

This question relates to whether token holders can earn more tokens by conducting certain actions on the network, or whether the benefits to token holders are consistent. As all Elepig holders get 50% off exchange transactions forever (when they pay with EPG) the benefit is consistent.

Score for Question 2.1 = 60

Score for Question 2.1 = 25

Score for Element 2 = 85

Element 3 concerns the Expectation of Profit that potential investors may reasonably have.

3.1 What function does the token have?

This question explores the wider question of the token functionality, plus any rights bestowed upon token holders.

The Elepig token will have a very specific function, which is to enable tokenholders to pay for exchange transaction fees and receive half price transactions. Token holders will also have the right to take part in alpha/beta testing of the exchange and help shape the service by providing feedback and participate in key decision making via a token holder voting platform. Finally — although our service support will be world-beating for all users — token holders will receive a premium support service with expedited Service Level Agreements (SLA’s).

Q3.2 Does the holder rely on manual, off-blockchain action to realize the benefit of the token?

A token whose value depends on someone taking specific manual action outside of the network means that the token is not functional in and of itself. Instead, the token relies on a level of trust in a third party taking action off-blockchain. This sort of token is more likely to be bought for speculation — i.e. the expectation of profits. In contrast a token which is built with all the necessary technical permissions means that the token holder does not rely on manual actions of any third party. This means that the buyers are more likely to purchase the token for use rather than with the expectation of profit from the efforts of others.

All user actions will be conducted within the Elepig Exchange ecosystem, and all transactions will be on-chain.

Q3.3 What is the timing of the sale?

Same question and answer as 2.1 — it is scored again in this section as it has a slightly different implication in terms of expectation of profit.

Q3.4 Can the token holders exercise real and significant control via voting?

If the collective approval of token holders is required in order for the development team to access the funds raised in the crowdsale, then any value realized by the token holders is more closely tied to their own decisions, and less reliant on the efforts of others.

We have a Founders, Team, Advisors and Angels Vesting Plan coded into the logic of our smart contract. The founding team’s tokens are split over five payments (four years) and will be tied to explicit milestones and Key Performance Indicators (KPIs). The community will get to vote and decide whether or not these KPI’s have been met.

Q3.4 How is the token sale marketed?

The headline on our website refers to a ‘token sale’ which is the preferred term. Whilst it is true that the term “ICO” is also used (in our whitepaper), this is because it is industry shorthand referring to the specific structure of our token distribution event, not because we are trying to attract speculators. We are very careful not to use any language referring to “high ROI” or “investor profits” and we go to great pains to explain the utility and purpose of the token, which is to obtain half price transaction fees when buying and selling other cryptocurrency pairs. By necessity the EPG token will be tradable with other cryptocurrencies but the primary purpose of this is to enable seamless purchase from multiple crypto wallet types, not as a vehicle for an investment or speculation.

Score for Question 3.1 = 0

Score for Question 3.2 = 0

Score for Question 3.3 = 10

Score for Question 3.4 = -20

Score for Question 3.5 = 0

Score for Element 3 = -10

OVERALL RISK SCORE = 0

In order to be deemed a security, the project must pass certain thresholds in all three Elements. Whilst Elepig passes the thresholds in the first two Elements, it scores an extremely low (minus figure) score in the last Element and an overall risk score of 0.

Therefore Elepig is UNLIKELY to be deemed a security, as per the well-regarded and long-established Howey test.

This article should not be treated as financial, investment or legal advice. Elepig always implores you to DYOR.