Is Digital Gem Token A Security Under the SEC Regulations?

This analysis is solely our interpretation and is not authoritative. However, this analysis gives us more comfort and guides us in our token's direction.

We based the analysis on https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets

The short answer is that based on our interpretation, we do not think that Digital Gem Token is a security.

A more detailed analysis is listed below:

Reliance on the efforts of others:

The inquiry into whether a purchaser is relying on the efforts of others focuses on two key issues:

Does the purchaser reasonably expect to rely on the efforts of an AP?

Digital Gem is decentalized and the delegates along with the community makes decisions by consensus. The founder is just one of the many stakeholders.

Are those efforts "the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise,"[14] as opposed to efforts that are more ministerial in nature?

It is more ministerial in nature.

Although no one of the following characteristics is necessarily determinative, the stronger their presence, the more likely it is that a purchaser of a digital asset is relying on the "efforts of others"

An AP is responsible for the development, improvement (or enhancement), operation, or promotion of the network,[15] particularly if purchasers of the digital asset expect an AP to be performing or overseeing tasks that are necessary for the network or digital asset to achieve or retain its intended purpose or functionality.[16]

Where the network or the digital asset is still in development and the network or digital asset is not fully functional at the time of the offer or sale, purchasers would reasonably expect an AP to further develop the functionality of the network or digital asset (directly or indirectly).  This particularly would be the case where an AP promises further developmental efforts in order for the digital asset to attain or grow in value.

 

The network is 100% live and has achieved it's purpose (to be a store of value cryptocurrency based on Delegated Proof of Stake) on day one of the mainnet launch. The ongoing patches, updates and security updates are all performed by attaining agreement from the delegates.

There are essential tasks or responsibilities performed and expected to be performed by an AP, rather than an unaffiliated, dispersed community of network users (commonly known as a "decentralized" network).

There are no tasks in which the AP is required. Any and all tasks can be performed equally well by the dispersed community of network users.
 

An AP creates or supports a market for,[17] or the price of, the digital asset.  This can include, for example, an AP that:  (1) controls the creation and issuance of the digital asset; or (2) takes other actions to support a market price of the digital asset, such as by limiting supply or ensuring scarcity, through, for example, buybacks, "burning," or other activities.
 

The AP does not control any aspect of the creation and issuance of the digital asset in the ongoing mainnet. The creation and issuance of the digital asset is fixed by code and is limited to 1 Digital Gem per 8 second block time. Also, the AP does not do buybacks or burn the digital asset.

An AP has a lead or central role in the direction of the ongoing development of the network or the digital asset.  In particular, an AP plays a lead or central role in deciding governance issues, code updates, or how third parties participate in the validation of transactions that occur with respect to the digital asset.

The dispersed community of network users, through consensus, comes up with the direction of the ongoing development. Delegates in particular have most of the power. However, the AP does hope that the vision (To be a store of value cryptocurrency based on Delegated Proof of Stake) stays the same.
 

An AP has a continuing managerial role in making decisions about or exercising judgment concerning the network or the characteristics or rights the digital asset represents including, for example:

  • Determining whether and how to compensate persons providing services to the network or to the entity or entities charged with oversight of the network.

    • Initially there are airdrops and token compensation but the goal of that is to make Digital Gem Token into a decentralized network that can sustain itself.​

  • Determining whether and where the digital asset will trade.  For example, purchasers may reasonably rely on an AP for liquidity, such as where the AP has arranged, or promised to arrange for, the trading of the digital asset on a secondary market or platform.

    • Once the token is decentralized, it will not rely on the AP for any liquidity issues. The AP will have a complete hands off approach to all trading activities.​

  • Determining who will receive additional digital assets and under what conditions.

    • Initially there are airdrops and token compensation but the goal of that is to make Digital Gem Token into a decentralized network that can sustain itself.​

  • Making or contributing to managerial level business decisions, such as how to deploy funds raised from sales of the digital asset.

    • There is no management structure in Digital Gem Token, the network is designed to be decentralized.​

  • Playing a leading role in the validation or confirmation of transactions on the network, or in some other way having responsibility for the ongoing security of the network. 

    • No, because of the airdrops, even on 7/2/2018, the second month of the mainnet launch, the AP controls less than 50% of the delegate nodes.​

  • Making other managerial judgements or decisions that will directly or indirectly impact the success of the network or the value of the digital asset generally. 

    • No, all judgements and decisions have to be approved by the delegates which the AP does not control.

Purchasers would reasonably expect the AP to undertake efforts to promote its own interests and enhance the value of the network or digital asset, such as where:

  • The AP has the ability to realize capital appreciation from the value of the digital asset.  This can be demonstrated, for example, if the AP retains a stake or interest in the digital asset.  In these instances, purchasers would reasonably expect the AP to undertake efforts to promote its own interests and enhance the value of the network or digital asset.

    • At inception, this is true but as time goes on, the AP will retain a smaller and smaller stake in the digital asset and the goal is still the same, to make the network sufficiently decentralized so that it can govern itself similar to Bitcoin.​

  • The AP distributes the digital asset as compensation to management or the AP's compensation is tied to the price of the digital asset in the secondary market.  To the extent these facts are present, the compensated individuals can be expected to take steps to build the value of the digital asset.

    • There is no management structure in Digital Gem Token, the network is designed to be decentralized.​

  • The AP owns or controls ownership of intellectual property rights of the network or digital asset, directly or indirectly.

    • No. the code is completely open source and the AP does not have ownership over any intellectual property.​

  • The AP monetizes the value of the digital asset, especially where the digital asset has limited functionality.

    • The digital asset has full functionality and has achieved it's vision 100% at inception.​ The ongoing updates are more geared towards security updates and minor improvements to the network.

In evaluating whether a digital asset previously sold as a security should be reevaluated at the time of later offers or sales, there would be additional considerations as they relate to the "efforts of others," including but not limited to:

  • Whether or not the efforts of an AP, including any successor AP, continue to be important to the value of an investment in the digital asset.

    • The goal of the AP is to have a hands off approach once the network gets sufficiently decentralized.​

  • Whether the network on which the digital asset is to function operates in such a manner that purchasers would no longer reasonably expect an AP to carry out essential managerial or entrepreneurial efforts.

    • The network is progressing towards complete decentralization whereby the AP will not carry out any managerial or entrepreneurial efforts. Those are taken over by the delegates and the community.​

  • Whether the efforts of an AP are no longer affecting the enterprise's success.

    • Once the network is sufficiently decentralized, the AP will have no bearing on the enterprise's success.​

Reasonable Expectation of Profits:

An evaluation of the digital asset should also consider whether there is a reasonable expectation of profits.  Profits can be, among other things, capital appreciation resulting from the development of the initial investment or business enterprise or a participation in earnings resulting from the use of purchasers' funds.[18]  Price appreciation resulting solely from external market forces (such as general inflationary trends or the economy) impacting the supply and demand for an underlying asset generally is not considered "profit" under the Howey test.

Digital Gem Token has attained 100% of it's goal to be a store of value cryptocurrency based on Delegated Proof of Stake on the first day of the mainnet launch. Therefore, all or any price appreciation after the first instance of the mainnet launch, is solely from external market forces.

The more the following characteristics are present, the more likely it is that there is a reasonable expectation of profit:

  • The digital asset gives the holder rights to share in the enterprise's income or profits or to realize gain from capital appreciation of the digital asset.

    • The opportunity may result from appreciation in the value of the digital asset that comes, at least in part, from the operation, promotion, improvement, or other positive developments in the network, particularly if there is a secondary trading market that enables digital asset holders to resell their digital assets and realize gains.

      • Digital Gem Token has attained 100% of it's goal to be a store of value cryptocurrency based on Delegated Proof of Stake on the first day of the mainnet launch. Therefore, all or any price appreciation after the first instance of the mainnet launch, is solely from external market forces.

    • This also can be the case where the digital asset gives the holder rights to dividends or distributions.

      • The digital asset operates solely as a cryptocurrency exactly the same as Bitcoin and gives the holder no rights as to dividends or distributions.​

  • The digital asset is transferable or traded on or through a secondary market or platform, or is expected to be in the future.[19]

    • Yes​, it is expected to be traded through an exchange in the future.

  • Purchasers reasonably would expect that an AP's efforts will result in capital appreciation of the digital asset and therefore be able to earn a return on their purchase. 

    • Digital Gem Token has attained 100% of it's goal to be a store of value cryptocurrency based on Delegated Proof of Stake on the first day of the mainnet launch. The AP's ongoing efforts are minor because the entire goal is to create a store of value cryptocurrency based on Delegated Proof of Stake and that goal has been achieved on the day of the mainnet launch.

  • The digital asset is offered broadly to potential purchasers as compared to being targeted to expected users of the goods or services or those who have a need for the functionality of the network.

    • The digital asset is offered and purchased in quantities indicative of investment intent instead of quantities indicative of a user of the network.  For example, it is offered and purchased in quantities significantly greater than any likely user would reasonably need, or so small as to make actual use of the asset in the network impractical.

      • Digital Gem Token has attained 100% of it's goal to be a store of value cryptocurrency based on Delegated Proof of Stake on the first day of the mainnet launch. As such, we can not control as to how people use Digital Gem Token whether it is to hoard them like digital gold or to use them as a payment for services. Both of these functionalities are 100% ready as of day one.

  • There is little apparent correlation between the purchase/offering price of the digital asset and the market price of the particular goods or services that can be acquired in exchange for the digital asset.

    • Digital Gem Token is not listed on an exchange yet but the price will be determined by market forces.​

  • There is little apparent correlation between quantities the digital asset typically trades in (or the amounts that purchasers typically purchase) and the amount of the underlying goods or services a typical consumer would purchase for use or consumption.

    • Digital Gem Token has attained 100% of it's goal to be a store of value cryptocurrency based on Delegated Proof of Stake on the first day of the mainnet launch. As such, we can not control as to how people use Digital Gem Token whether it is to hoard them like digital gold or to use them as a payment for services. Both of these functionalities are 100% ready as of day one.

  • The AP has raised an amount of funds in excess of what may be needed to establish a functional network or digital asset. 

    • The AP has raised zero funds, on the contrary, the AP has incurred costs associated with getting the network live.​

  • The AP is able to benefit from its efforts as a result of holding the same class of digital assets as those being distributed to the public. 

    • Yes​.

  • The AP continues to expend funds from proceeds or operations to enhance the functionality or value of the network or digital asset.

    • True at the beginning but the AP's goal is to have a hands off approach to things once the network is sufficiently decentralized and let the community take over.​

  • The digital asset is marketed, directly or indirectly, using any of the following:

    • The expertise of an AP or its ability to build or grow the value of the network or digital asset.

      • No, the decentralized network of delegates and users is the engine of the growth.​

    • The digital asset is marketed in terms that indicate it is an investment or that the solicited holders are investors.

      • No, we want actual users who's vision is in line with Digital Gem Token as a store of value cryptocurrency that can also be used as payments exactly the same as Bitcoin.​ The difference is that Digital Gem Token is based on Delegated Proof of Stake whereas Bitcoin is based on Proof of Work.

    • The intended use of the proceeds from the sale of the digital asset is to develop the network or digital asset.

      • The AP has raised zero funds, on the contrary, the AP has incurred costs associated with getting the network live.​

    • The future (and not present) functionality of the network or digital asset, and the prospect that an AP will deliver that functionality.

      • All of Digital Gem Token's functionality (To be a store of value cryptocurrency) is 100% live as of the launch date.​

    • The promise (implied or explicit) to build a business or operation as opposed to delivering currently available goods or services for use on an existing network.

      • All of Digital Gem Token's functionality (To be a store of value cryptocurrency) is 100% live as of the launch date.​​

    • The ready transferability of the digital asset is a key selling feature.  

      • Yes, being able to transfer Digital Gem Token just like how Bitcoin does, is a good feature and is 100% live as of the launch date.​

    • The potential profitability of the operations of the network, or the potential appreciation in the value of the digital asset, is emphasized in marketing or other promotional materials.

      • No, the marketing materials mainly state that Digital Gem Token's vision is to be a store of value cryptocurrency that is more scale able, faster and energy efficient than Bitcoin, all of which is true.

    • The availability of a market for the trading of the digital asset, particularly where the AP implicitly or explicitly promises to create or otherwise support a trading market for the digital asset.

      • Digital Gem Token aims to be listed on an exchange in the future.​

In evaluating whether a digital asset previously sold as a security should be reevaluated at the time of later offers or sales, there would be additional considerations as they relate to the "reasonable expectation of profits," including but not limited to:

  • Purchasers of the digital asset no longer reasonably expect that continued development efforts of an AP will be a key factor for determining the value of the digital asset.

    • Even as of the launch date, the efforts of the AP is not the key factor in the continued development.​ Digital Gem Token's vision of it's functionality is 100% live as of the launch date.

  • The value of the digital asset has shown a direct and stable correlation to the value of the good or service for which it may be exchanged or redeemed.

    • Yes, we anticipate that once Digital Gem Token is listed on an exchange.​

  • The trading volume for the digital asset corresponds to the level of demand for the good or service for which it may be exchanged or redeemed.

    • Yes, we expect that once Digital Gem Token is listed on an exchange.​

  • Whether holders are then able to use the digital asset for its intended functionality, such as to acquire goods and services on or through the network or platform.

    • The holders are already able to use Digital Gem Token for it's intended functionality on day 1 of the launch.​

  • Whether any economic benefit that may be derived from appreciation in the value of the digital asset is incidental to obtaining the right to use it for its intended functionality.

    • True​.

  • No AP has access to material, non-public information or could otherwise be deemed to hold material inside information about the digital asset.

    • True.​

Other Relevant Considerations:

When assessing whether there is a reasonable expectation of profit derived from the efforts of others, federal courts look to the economic reality of the transaction.[20]  In doing so, the courts also have considered whether the instrument is offered and sold for use or consumption by purchasers.[21]  

Although no one of the following characteristics of use or consumption is necessarily determinative, the stronger their presence, the less likely the Howey test is met:

  • The distributed ledger network and digital asset are fully developed and operational.

    • Yes, this is true on day 1 of the mainnet launch.​

  • Holders of the digital asset are immediately able to use it for its intended functionality on the network, particularly where there are built-in incentives to encourage such use.

    • Yes, this is true on day 1 of the mainnet launch.​

  • The digital assets' creation and structure is designed and implemented to meet the needs of its users, rather than to feed speculation as to its value or development of its network.  For example, the digital asset can only be used on the network and generally can be held or transferred only in amounts that correspond to a purchaser's expected use.

    • Yes, Digital Gem Token's creation and structure is designed and implemented to meet the needs of its users which is a store of value cryptocurrency based on Delegated Proof of Stake and it's functionality is achieved on day 1 of the mainnet launch. However, whether the users hoard it like digital gold or use it for payments is something that the AP has no control over.​

  • Prospects for appreciation in the value of the digital asset are limited.  For example, the design of the digital asset provides that its value will remain constant or even degrade over time, and, therefore, a reasonable purchaser would not be expected to hold the digital asset for extended periods as an investment.

    • Yes, the design of Digital Gem Token is for it's value to remain constant over time due to it's inflation rate being 0.25% per year.​

  • With respect to a digital asset referred to as a virtual currency, it can immediately be used to make payments in a wide variety of contexts, or acts as a substitute for real (or fiat) currency. 

    • This means that it is possible to pay for goods or services with the digital asset without first having to convert it to another digital asset or real currency.

      • True as of day 1 of the mainnet launch.​

    • If it is characterized as a virtual currency, the digital asset actually operates as a store of value that can be saved, retrieved, and exchanged for something of value at a later time.

      • True as of day 1 of the mainnet launch.​

  • With respect to a digital asset that represents rights to a good or service, it currently can be redeemed within a developed network or platform to acquire or otherwise use those goods or services.  Relevant factors may include: 

    • There is a correlation between the purchase price of the digital asset and a market price of the particular good or service for which it may be redeemed or exchanged. 

      • Yes, we expect this to be true.

    • The digital asset is available in increments that correlate with a consumptive intent versus an investment or speculative purpose.

      • Yes.​

    • An intent to consume the digital asset may also be more evident if the good or service underlying the digital asset can only be acquired, or more efficiently acquired, through the use of the digital asset on the network.

      • There is no goods or services underlying the digital asset, Digital Gem Token operates exactly like Bitcoin but with Delegated Proof of Stake.

  • Any economic benefit that may be derived from appreciation in the value of the digital asset is incidental to obtaining the right to use it for its intended functionality.

    • Yes.​

  • The digital asset is marketed in a manner that emphasizes the functionality of the digital asset, and not the potential for the increase in market value of the digital asset.

    • Yes, it is marketed as a store of value cryptocurrency that is faster, more scaleable and more energy efficient than Bitcoin, all of which is true.​

  • Potential purchasers have the ability to use the network and use (or have used) the digital asset for its intended functionality.

    • Yes, full functionality is achieved on day 1 of the mainnet launch.​

  • Restrictions on the transferability of the digital asset are consistent with the asset's use and not facilitating a speculative market.

    • N/A​

  • If the AP facilitates the creation of a secondary market, transfers of the digital asset may only be made by and among users of the platform.

    • Yes, Digital Gem Token functions like Bitcoin but with Delegated Proof of Stake.​