Jan. 6 at 2:54 PM
$BCII Definition of a “security” under the Securities Act
Section 2(a)(1) of the Securities Act defines the term “security” broadly to include a number of
specifically enumerated financial instruments, such as notes, stocks, and bonds. Where an instrument does
not fall within any of the specifically enumerated items in Section 2(a)(1), the SEC analyzes transactions
involving such arrangements under the “investment contract” test set forth in SEC v. W.J. Howey Co.
10
Under Howey, instruments or arrangements not otherwise listed as securities in Section 2(a)(1) are analyzed
based on their “economic realities.”11 This analysis involves assessing whether there is (i) an investment of
9 The Supreme Court in SEC v. Edwards indicates that the definition of a security in Section 2(a)(1) of the Securities
Act is “essentially identical in meaning” to the definition of security in Section 3(a)(10) of the Securities Act. See SEC
v. Edwards 540 U.S. 389, 393 (2004). As such, our reasoning that follows applies to both Section 2(a)(1) of the
Securities Act and Section 3(a)(10) of the Exchange Act.
10 SEC v. W.J. Howey Co., 328 U.S. 293 (1946).
11 Landreth Timber Co. v. Landreth, 471 U.S. 681, 689 (1985), where the U.S. Supreme Court suggested that the
proper test for determining whether a particular instrument that is not clearly within the definition of “stock” in
Section Securities Act 2(a)(1), or that otherwise is of an unusual nature, is the economic realities test set forth in
Howey. In analyzing whether an instrument is a security, “form should be disregarded for substance,” Tcherepnin v.
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money, which is broadly understood to include any transfer of value, (ii) in a common enterprise, (iii) in
which the investor is led to expect profits, (iv) that are derived from the entrepreneurial or managerial
efforts of one or more third parties.12 The Court in Forman indicated that essential to such determination is
whether the purchased instrument is purchased upon the premise of a “reasonable expectation of profits to
be derived from the entrepreneurial or managerial efforts of others.”13 Satisfying the requirement for the
“efforts of others” prong further required that such efforts are “undeniably significant ones, [the] essential
managerial efforts which affect the failure or success of the enterprise.”14
We believe the offer and sale of the Tokens, in the manner and under the circumstances described
above, would not be considered to involve an “investment contract” under Howey and its progeny. Fuse
will not sell Tokens to consumers for cash, and all distributions of Tokens reward consumers for their
substantive actions on the Fuse Network described herein, such as, to adopt DERs in their households and
to participate more efficiently in the energy system. Furthermore, Tokens can only be redeemed with Fuse,
and only for limited discounts on Fuse Goods and Services. As a result, the economic reality is that the
Tokens are an incentive, along with the lower energy consumption, utility cost savings, and better utilization
of DER assets, that effectively compensate consumer participation in the Fuse Network. The Token’s value
is directly tied to its utility in the Fuse Network and not for speculative investment purposes. That is, the
value of the Token will not be based on the overall success of the Fuse Network or other efforts undertaken
by Fuse. Moreover, the redemption value of each Token will be based on the average market price of the
Tokens on third-party unaffiliated digital asset markets at the time of the redemption, which will act to limit
demand for the Tokens on the secondary market and to support the orderly and stable trading of the Tokens.
That is, if the price of Fuse Tokens were to exceed the applicable redemption value, consumers would
simply choose to pay for their Fuse Goods and Services out of pocket rather than purchasing Tokens on the
secondary market.
For the present purposes, the truly relevant portion of the Howey test is the “reasonable expectation
of profits to be derived from the entrepreneurial or managerial efforts of others” prong, and accordingly,
we will focus on that element of the Howey test.15
b. The Tokens are earned for consumptive intent and not with an expectation of profit.
In Forman, the Court examined whether the purchaser is “attracted solely by the prospects of a
‘return’ on his investment” or “motivated by a desire to use or consume the item purchased.”16 In analyzing
this question, the Court conducted an “objective inquiry … into what the purchasers were ‘led to expect’,”17
specifically whether marketing of the Co-op and purchase of Co-op “stock” in that case induced a purchaser
to expect profit18 and whether the economic reality of owning Co-op “stock” would cause a purchaser to
Knight, 389 U.S. 332, 336 (1967), “and the emphasis should be on economic realities underlying a transaction, and
not on the name appended thereto.” United Housing Found., Inc. v. Forman, 421 U.S. 837, 849 (1975).
12 Howey at 301.
13 Forman, at 852.
14 Forman, at 852.
15 Accordingly, we do not address the “investment of money” or “common enterprise” elements of the Howey test.
16 Forman, at 852 (citing Howey, 328 U.S. at 300).
17 Warfield v. Alaniz, 569 F.3d 1015, 1021 (9th Cir. 2009).
18 Forman, at 852 - 854 (discussing the impact of the “Information Bulletin” on the expectations of purchasers of
Co-op “stock”); see Teague v. Bakker, 35 F.3d 978, 989 (4th Cir. 1994) (“the Court in Forman focused not on the
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have an expectation of profit.19 Applying such objective analysis to the Fuse Network and the Tokens yields
the same result as in Forman – the Tokens are utilized to participate in the Fuse Network for the purpose
of receiving discounts on Fuse Goods and Services. Moreover, the Tokens have not been, are not and will
not be marketed as an investment or otherwise in a manner that would cause a purchaser to have an
expectation of profit. Because the economic reality of any upside for earning, holding, redeeming, and
selling the Token has nothing to do with the success of Fuse or the Fuse Network, it would not cause a
reasonable purchaser to have an expectation of profit based on such success and efforts.
The Token has been designed for one purpose: consumptive use in connection with the Fuse
Network. A consumer’s primary motivation for participating in the Fuse Network is (i) a reduction in their
electricity bill that may occur due to more efficient grid conditions (leading to reduced electricity prices),
and consumption (based on flexibility determined by the consumer) and (ii) the ability to redeem the Tokens
for Fuse Goods and Services. As in the CommunitySun, LLC No-Action Letter, such a reduction or
redemption capability should not be considered “profits” to the consumer; rather, it is more akin to a rebate
to encourage certain consumptive behaviors – in the same manner as the consumption of clean energy and
promotion of Grid-Support Objectives in the case of CommunitySun and Fuse, respectively.20
Fuse’s marketing will emphasize the consumptive use of the Tokens and make clear to consumers
that the Tokens are not intended as investments, and will not inherently provide any return, profit, dividend
or distribution or other similar feature to consumers as a result of Fuse’s efforts. While Fuse may market
the Tokens to consumers, it will do so by showcasing the redemption opportunities on the Fuse Network,
not by promoting any secondary market. Furthermore, the Fuse App terms of service will comport with
these marketing descriptions and formalize the Token’s consumptive purpose and the available redemption
opportunities (and limitations) for consumers. Furthermore, the Tokens will be marketed and distributed
“solely for consumptive use as a means of interacting with” the Fuse Network, and the Tokens will be
immediately useable for their intended purpose at the time they are awarded, aligning with the Pocketful of
Quarters, Inc. No-Action Letter and IMVU No-Action Letter.21 The focus of marketing efforts solely on
the consumptive use of the Tokens as a means of exchanging value on, and in connection with, the Fuse
Network further aligns with the Staff’s views in the Pocketful of Quarters, Inc. No-Action Letter.22
The economic reality of the redemption mechanism for the Tokens clearly indicates to consumers
the consumptive purpose of the Token and its maximum discount value, which effectively acts to limit
potential speculation in the Token, creating a relatively stable, capped value for the Tokens, thus reducing
or eliminating any reasonable expectation of profit. Specifically, immediately upon the public launch of the
Tokens, the Tokens will be redeemable for a specified and exclusive discount on Fuse Goods and Services
– their sole utility. While that discount amount is set from time to time by Fuse, it will not exceed 100% of
testimony of purchasers of cooperative apartments, but on whether the marketing approach adopted by the sellers
was likely to induce purchasers interested in turning a profit”).
19 Forman, at 855 – 858 (discussing potential manners in which holders of Co-op “stock” may receive revenue or
cost savings and whether the possibility of such created an expectation of profit).
20 CommunitySun, LLC SEC No-Action Letter (Aug. 11, 2011), at page 11.
21 Div. of Corp. Fin., Response of the Division of Corporation Finance Re: Pocketful of Quarters, Inc., U.S. SEC.
AND EXCH. COMM’N (July 25, 2019) [hereinafter “Pocketful of Quarters No-Action Letter”];
https://www.sec.gov/corpfin/pocketful-quarters-inc-072519-2a1; Div. of Corp. Fin., Response of the Division of
Corporation Finance Re: IMVU, Inc., U.S. SEC. AND EXCH. COMM’N (Nov. 19, 2020), https://www.sec.gov/rules-
regulations/no-action-interpretive-exemptive-letters/division-corporation-finance-no-action/imvu-111920-2a1
