NCFP-1: Review of Security Status and Legal Memoranda

Author: @jimtalksdata

Background : Use of blockchain has legal implications. In lieu of listing fees, reputable exchanges conduct compliance reviews. In particular, Bittrex requires legal memorandum or opinion from its U.S.-qualified external legal counsel certifying that (a) the Candidate Token is not a security under applicable securities laws, and (b) that trades of the Candidate Tokens would not be subject to regulation under any applicable laws applicable to trading of commodities.

Compliance reviews are simplified for coins that already exist, such as Nyzo. Thus, the cost to conduct them is much lower than that of coin or equity-based offerings that have no working product (i.e. “whitepaper-only” projects).

[redacted] (Firm A) are U.S. qualified lawyers dedicated to helping preeminent blockchain and cryptocurrency projects gain and maintain compliance with U.S. securities laws. Prior to their establishment, they litigated complex securities class actions against large financial institutions, and represented whistleblowers in False Claims Act cases against corporations that defrauded taxpayers, as well as representing investors and financial advisers in FINRA, AAA, and JAMS arbitration. Their satisfied clients include large cryptocurrency products such as Ardor/Ignis, Vericoin, and Bitcoin.com, as well as cryptocurrency venture capital funds and individuals in arbitration and consumer class actions.

As of 2019-09-19, transfers to the cycle account (0000000000000000-0000000000000000-0000000000000000-0000000000000002) are ongoing (Building a sustainable blockchain, part 2. https://nyzo.co/buildingNyzo2.). As per the recent memorandum, the existing dev fund would be entirely transferred to this account, leaving the development team with less than 0.6% of the total supply in existence and less than 0.6% of the verifiers remaining in the mesh. Both the development team as well as the primary exchange which trades Nyzo, qTrade, are primarily U.S. entities. Thus, this would be an ideal time to obtain a legal opinion of the network in order to clarify Nyzo’s compliance with U.S. security law.

Proposal : Conduct legal review of the Nyzo blockchain and produce an official legal memorandum under compliant with U.S. security laws. Payment would be due only upon successfully completing the requested work. Turnaround time is expected to be 30 business days.

Cost: 4000 U.S. dollars ( or equivalent in Bitcoin). The conversion rate for Nyzo will be set by the 7-day average trading price of Nyzo on QTrade.io prior to the approval date of this proposal (pending details on how this figure is calculated). The conversion price for bitcoin to U.S. dollars will be set by the Coindesk Bitcoin Index (https://www.coindesk.com/price/bitcoin).

Competitive analysis: The cost for obtaining legal memoranda such as the proposed is approximately $5000 ( In discussion of Ubiq/GEOcoin (personal communication, July 2019)). Obtaining legal representation from firms not specializing in cryptocurrency poses further knowledge gaps, and costs are estimated to be in the tens of thousands, if not more. Thus, the current offer was judged to be quite competitive.

Chief risks and mitigation:

Security status – Various factors could cause Nyzo to pass the Howey Test and therefore be deemed a security. In this case, the legal memorandum produced would still be useful to clarify Nyzo’s security status, but not directly useful for exchange inquiries.

In this case, efforts would be redirected to focus on producing a SEC letter of no action. As cryptocurrency is an emerging field, obtaining clarity from a regulatory agency such as the SEC would be beneficial to avoid unknowingly conducting activities that fall within the jurisdiction of these agencies. An example is included (Re: TurnKey Jet, Inc. https://www.sec.gov/divisions/corpfin/cf-noaction/2019/turnkey-jet-040219-2a1-incoming.pdf).

Deliverability - Much less likely, Firm A could fail to delivery timely legal memoranda. Arbitration would likely be pursued in this case.

Payment would be due only upon successfully completing the requested work. Turnaround time is expected to be 60 business days.

Due to confidentiality requirements, legal memoranda, nor details of the firm, cannot be published or disseminated publicly, except to cryptocurrency exchanges that require them. @nyzo will certify that the memorandum is objective and has been completed to the satisfaction of the team.

Exchange risk – The price of bitcoin or nyzo could fluctuate significantly during the time that the review is being conducted

Half of the funds would be converted to USD upon receipt and held offline. The date and terms of said conversion will be announced. Over-the-counter trading will be considered to minimize market disruption. The author of the proposal is willing and able to assume remaining market risk to satisfy deliverability of the project.

Excess funds – Any funds in excess of that which is required to satisfactorily deliver this proposal (due to, example, favorable exchange rates) will be deposited back into the cycle-controlled account, 0000…0002.

Certification – This document is signed and dated on 9/27/2019 10:33:49 PM. The SHA-256 hash of a copy of this proposal will be generated, appended to the file name, and digitally signed in the Nyzo blockchain at a later date, and this transaction will be announced.

@jimtalksdata

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We believe that Nyzo does not pass the Howey Test (and is therefore not a security), but having a third party opinion would be valuable to us for our own due diligence. It would also be valuable to other exchanges concerned about Nyzo’s legal status.

@jimtalksdata I would suggest specifing an Agent who will be responsible for receipt, liquidation, and return of Nyzo disbursed as outlined in this proposal.

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Thanks Eric, I think that’s a great suggestion. @Showerhead#1095 or @vincent#9235 may be a good Agent for receiving the funds.