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Legal opinion

Legal opinion defining the Platform is not regulated under US laws

Overview of US regulations

We have submitted the request to obtain the legal opinion of the US legal advisor and asked to review the applicable federal laws, rules and regulations and to answer if the Platform needs to obtain registration as a Money Service Business in the USA.
Based on the foregoing, Adam Tracy, Esq. came to the conclusion that the Company is not subject to Money Service Business registration requirements. In particular, it was found the following:
  1. 1.
    Within the United States, the Company will not engage in “Money Transmission Services” insomuch that it will not accept the currency, funds or convertible virtual currency from one person for purposes of transferring the same to another person, rather relying on a licensed banking institution to provide such services. See, 31 CFR § 1010.100(ff)(5)(i)(A);
  2. 2.
    That the exchange or redemption of convertible virtual currency – i.e., the tokenized Company membership units, for fiat currency will only occur outside the United States, in such regard the Company is only acting as a “administrator” or “exchanger” of cryptocurrency outside the United States. See, 76 FR 45403 (July 29, 2011).
  3. 3.
    That the Company will be exempt, as defined in 9 W.S. 17-4-206(c), from the Wyoming Money Transmitters Act, Wyoming Statute 40-22-101, et seq. as a person who develops, sells or facilitates the exchange of an open blockchain token, as defined in 9 W.S. 17-4-206(c), from the Wyoming Money Transmitters Act, Wyoming Statute 40-22-101, et seq.

Definition of MSB

According to the Bank Secrecy Act Regulations - Definitions and Other Regulations Relating to Money Services Businesses, 76 FR 43585 (July 21, 2011), Money Service Business is defined as “a person wherever located doing business, whether or not on a regular basis or as an organized or licensed business concern, wholly or in substantial part within the United States,” operating directly, or through an agent, agency, branch, or office, who functions as, among other things, a “money transmitter.” The regulations further define a “money transmitter” to include a “person that provides money transmission services,” or “any other person engaged in the transfer of funds.” “Money Transmission Services” are defined as the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means.
However, the Regulations define a “transmitter” as “the sender of the first transmittal order in a transmittal of funds. The term transmitter includes an originator, except where the transmitter's financial institution is a financial institution or foreign financial agency other than a bank or foreign bank.” That is, a transmitter initiates a transaction that the money transmitter actually executes. In such a sense, the transmitter is the money transmitter’s customer and not itself a money transmitter.
Notwithstanding the foregoing, FinCEN has ruled that persons accepting and transmitting value that substitutes for currency, such as virtual currency, are money transmitters. Persons accepting and transmitting “convertible virtual currency” are required to register with FinCEN as a Money Service Business. These requirements apply equally to domestic and foreign-located [convertible virtual currency] money transmitters doing business in whole or in substantial part within the United States, even if the foreign-located entity has no physical presence in the United States.
FinCEN’s regulations define currency (also referred to as “real” currency) as “the coin and paper money of the United States or of any other country that [i] is designated as legal tender and that [ii] circulates and [iii] is customarily used and accepted as a medium of exchange in the country of issuance.” In contrast to real currency, “virtual” currency is a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction.
FinCEN refers to the participants in virtual currency arrangements using the terms “user,” “exchanger,” and “administrator.” 76 FR 45403 (July 29, 2011). A user is a person that obtains virtual currency to purchase goods or services. An exchanger is a person engaged in business in the exchange of virtual currency for real currency, funds, or other virtual currency. An administrator is a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency.
Under existing Bank Secrecy Act regulations, FinCEN has defined money services businesses to include five distinct types of financial services providers and the U.S. Postal Service: (1) currency dealers or exchangers; (2) check cashers; (3) issuers of traveler’s checks, money orders, or stored value; (4) sellers or redeemers of traveler’s checks, money orders, or stored value; and (5) money transmitters. FinCEN’s regulations define the term “money transmitter” as a person that provides money transmission services, or any other person engaged in the transfer of funds. The term “money transmission services” means “the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds or other value that substitutes for currency to another location or person by any means.”
According to FIN-2013-G001, an administrator or exchanger that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN regulations, unless a limitation to or exception from the definition applies to the person. However, a user who obtains virtual currency and uses it to purchase real or virtual goods or services is not a money transmitter under FinCEN regulation. Moreover, in FIN-2014-R001, FinCEN has also held that a corporate investor that invests in virtual currency solely for the benefit of the company is a user despite certain activities it engages in to exchange or convert virtual currency. FinCEN determined that when a company “invests in a convertible virtual currency for its own account, and when it realizes the value of [that] investment, it is acting as a user of that convertible virtual currency within the meaning of the guidance.”

Special regulatory treatment in Wyoming

According to the Wyoming House Bill No. HB0070 “a person who develops, sells or facilitates the exchange of an open blockchain token (such as certain cryptocurrency) is not subject to specified securities and money transmission laws in Wyoming” if all of the following are met:
(i) The token has not been marketed by the developer or seller as an investment;
(ii) The token is exchangeable for goods or services; and
(iii) The developer or seller of the token has not entered into a repurchase agreement of any kind or entered into an agreement to locate a buyer for the token.
Further, a person who facilitates the exchange of an open blockchain token shall not be deemed a broker-dealer or a person who otherwise deals in securities under Wyoming Law and shall not be subject to the provisions of W.S. 17-4-301 through 17-4-510 if all of the following are met:
(i) The person has a reasonable and good faith belief that a token subject to exchange:
(ii) Conforms to the requirements of paragraphs (a)(i) and (ii) of W.S. Section 17-4-206; and
(iii) Is not the subject of a repurchase agreement of any kind or the subject of an agreement to locate a buyer for the token.
(iv) The person takes reasonably prompt action to terminate the exchange of a token that does not conform to the requirements of this W.S. Section 17-4-206.
As used in this W.S. Section 17-4-206, “open blockchain token” means a digital unit which is:
(i) Created:
(A) In response to the verification or collection of a specified number of transactions relating to a digital ledger or database;
(B) Based on random selection or the possession or age of existing units; or
(C) Using any combination of the methods specified in subparagraphs (A) and (B) of this paragraph.
(ii) Recorded in a digital ledger or database which is chronological, consensus-based, decentralized and mathematically verified in nature, especially relating to the supply of units and their distribution; and
(iii) Capable of being traded or transferred between persons without an intermediary or custodian of value.
Wyoming Statute Section 17-4-102 was amended to exclude a person who facilitates the exchange of an open blockchain token under Section 17-4-206(c) from the definition of a “Broker-dealer.” A Broker-dealer otherwise generally means a person engaged in the business of effecting transactions in securities for 2the account of others or for the person’s own account.
Wyoming Statute Section 17-4-102 was amended to exclude the open blockchain token from the definition of a “security.”
Wyoming Statute Section 40-22-104 was amended to exempt a person who develops, sells or facilitates the exchange of an open blockchain token, as defined in 9 W.S. 17-4-206(c), from the Wyoming Money Transmitters Act, Wyoming Statute 40-22-101, et seq.
Thus, the Company will be exempt as defined in 9 W.S. 17-4-206(c), from the Wyoming Money Transmitters Act, Wyoming Statute 40-22-101, et seq. as a person who develops, sells or facilitates the exchange of an open blockchain token, as defined in 9 W.S. 17-4-206(c), from the Wyoming Money Transmitters Act, Wyoming Statute 40-22-101, et seq.

Securities defined

Section 2(a)(1) of the Securities Act 1933, in relevant part, defines a security as: “any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement … investment contract … or, in general, any interest or instrument commonly known as a ‘security’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.”
Under the holding in the seminal case, Securities and Exchange Commission v. W. J. Howey Co. 328 U.S. 293, 298-299 (1946), an investment contract is defined as any contract, transaction or scheme involving; (a) an investment of money; (b) in a common enterprise; and (c) with the expectation that profits will be derived from the efforts of the promoter or a third party. Subsequent decisions would rely on the “risk capital test” for determining the existence of a security. See, Securities and Exchange Commission v. Glen W. Turner, 348 F.Supp. 767 (D. Or. 1972). The test looks at whether an investor subjects his money to the risk of an enterprise over which he exercises no managerial control. Id. The Court in Turner would go on to further define an “investment contract” as an investment in a common enterprise with the expectation of profits from the efforts of another.

Exemption based on distinct business model

Binaryx developed the model when tokens offered by DAO incorporated to purchase the real estate are not securities. This is also because in essence, we're using technology to allow a group of real estate investors to invest together in a single real estate property.
Generally, securities offered or sold in the United States must be registered with the Securities and Exchange Commission (SEC) unless the securities or offering qualify for an exemption from registration. Companies issuing securities must register their offerings with the SEC.
The Howey test is used to determine if something is an investment contract, and therefore a security, regulated by the SEC. To pass the Howey test, an offering or product must meet all four of the following criteria: (1) an investment of money, (2) in a common enterprise, (3) with the expectation of a profit, (4) to be derived from the efforts of others.
Specifically, the Basset Token may fail to meet the fourth element of the test, as token holders can not reasonably expect profits derived from efforts of our company. Rental returns are based on the DAO management of the property by the owner, and real estate price appreciation returns are determined by the market. Hence, we are assured by the US lawyers that our Basset Tokens in line with our business model shall not be considered securities under current securities regulations.
Moreover, the Securities Act of 1933 provides exemptions from registration that allow issuers to offer and sell securities avoiding this requirement.
Our legal team have reviewed all those exemptions to find an alternative option to recommend our users for the legal modeling. One of those is when LLC conducts an offering under Regulation S.
Foreign companies, as well as US, incorporated companies may conduct exempt offerings to foreign investors simultaneously under Regulation S. Under Regulation S (“Offshore Offers and Sales”), which was adopted by SEC in 1990, offers and sales of securities that occur outside of the United States are exempt from the registration requirements of Section 5 of the Securities Act of 1933. This regulation offers an exemption for qualifying foreign offerings made by U.S. companies.
The rule under Regulation S offers an exemption for qualifying foreign offerings made by U.S. companies. In simple words, Regulation S is a registration exemption that allows securities (or security tokens) only to be sold to non-US investors (accredited or unaccredited) exclusively outside of the United States.
For such an exception to apply, two conditions must be met: the existence of an offshore transaction that does not permit an offer and sale of securities to a person in the United States, and the buyer must be physically located or presumed to be located outside the United States, or the transaction is conducted in an offshore market; there can be no “directed selling efforts” in or into the United States of the securities offered under Regulation S.
Simply saying, Regulation S is a safe harbor from registration for Binaryx Platform DAOs LLC as long as the offer and sale of bAsset token occurs solely outside the United States. Thus, it may also be used.
As Binaryx has structured a platform where each user undertakes full Know Your Client (KYC) procedure before becoming a user ofhas Binaryx so the Company is in a position to ensure that Basset Tokens are not offered and sold to the residents from the United States of America. As the main investor pool for our project is non-US residents, the company can technically create barriers to restrict direct selling efforts of bAsset tokens into the USA. Likewise, SEC does not have jurisdiction over offerings made to foreign investors who do not reside in and have no jurisdictional ties to the United States.