To kick things off, I would introduce you to this interview with Bob Davenport, a regional director of the SEC, about the state of play in the world of securities fraud in the 1970s.
Spoiler alert: it’s possible for things that are a lot more tangible than a crypto-token to constitute a security.
“The beaver case was the big one.
“The beaver case was a case called SEC versus Weaver’s Beaver Association. One defendant appealed to the U.S. Supreme Court, which denied cert. A fellow in the Salt Lake area started a company called Weaver’s Beaver Association. They sold pairs of beaver, all over the United States and in foreign countries. These were purportedly domesticated beaver. You would buy a pair of beaver for several thousand dollars, and these beaver would have little beavers, called kits. Then these little kits would grow up, and they’d have more kits. And you would end up with this large herd of beaver. The beaver were to be sold to other purchasers. They had a marketing arm, where they would sell your pairs of beaver. There was going to be a tremendous demand for beaver pelts in coats, beaver hats, and everything—it’s coming back. So they sold millions and millions of dollars of these beaver. The salesmen represented that you could take possession of your beaver, and you can raise them in your own backyard, but if you don’t have the capabilities, we have beaver ranches all through the West—Montana, Wyoming, et cetera.
“At these beaver ranches we have little pens for each pair of beaver, they have nesting boxes, they have little swimming pools, and they’re fed a special diet. We’ll take care of your beaver for you for a hundred and fifty or a hundred seventy-five dollars per beaver per year, until you can sell it. Nobody could take care of beaver; you can’t put it in your bathtub. The purchasers would have to leave the beaver on the ranches. What happened was that all these beaver and their kits that was being sold to people could not be re-sold, because the Association was too busy selling their own beaver to take time to sell your beaver.
“So these people ended up with a large number of beaver, and they’re paying all these ranching fees. It was just a disaster. They really weren’t selling domesticated beaver; instead they were flying the beaver down from Canada and purchasing them from trappers in Canada at approximately twenty dollars a beaver. They’d fly them into Salt Lake, put tattoos in their back foot, in the web, and start selling them. They’d sell them for three thousand a pair and up.
“…What happened was: all the congressmen started leaning on the SEC. “What are you doing? You know, suing people that raise animals.” The SEC position was that it was an investment contract. You put your money in, you bought the beaver, they kept the beaver; they raised the beaver, they were to sell the beaver, and all the profits were supposed to come from a third person. The courts had no trouble finding an investment contract, and the Supreme Court denied cert.
“The SEC got a tremendous amount of pressure from the public. Hamer Budge came out to Denver in the middle of the case. I was in the office one day and he walked in and asked me if we have any more animal cases out here? I said, ‘No. We have no more animal cases.'”
“I learned a lesson then. I’ll go back to the more traditional securities frauds.”
H/T to Peter van Valkenburgh for sending this my way. This interview is possibly the funniest securities law-related document I’ve ever read.
Read the whole thing.