A cryptolaw analysis of the offer and sale of Taylor Swift concert tickets in a post-LBRY regulatory environment.

By Zack Shapiro. Credit to @RosenfeldM for the tweet that inspired this article.

Zack Shapiro is the Managing Partner at Rains, a modern law firm representing startups and investors in crypto, specializing in venture financing, securities law, and corporate law.

The chaotic rollout of the Taylor Swift “Eras” tour ticket sale, culminating in Ticketmaster halting the public sale of all tickets, has generated widespread critical commentary, with politicians such as Congresswoman Alexandra Ocasio Cortez tweeting, “[d]aily reminder that Ticketmaster is a monopoly, it’s [sic] merger with LiveNation should never have been approved, and they need to be reigned [sic] in” [1] and the Attorney General of Tennessee announcing that he would probe Ticketmaster for consumer rights and antitrust violations. [2] However, one angle of this story that has thus far been criminally under-analyzed is the main question on everyone’s mind: will SEC Chair Gary Gensler come out and declare that the offer and sale of these tickets constitutes an unregistered securities offering?

In order to determine whether or not the Ticketmaster presale of the Taylor Swift tour amounted to an unregistered securities offering pursuant to the Securities Act of 1933, as amended (the “Securities Act”) and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), [3] this article will explore whether the presale and subsequent secondary market trading of the Taylor Swift tickets meets the test for an “investment contract” as developed in a line of cases beginning with the Supreme Court’s 1946 decision in SEC v. W.J. Howey Co. [4] The Howey case examined the marketing and sale of undeveloped citrus groves and service contracts and concluded that the promoters had sold securities within the meaning of the Securities Act. In particular, the article will focus on recent case law in the area of crypto assets where the SEC has taken a particularly expansive view of the definition of an investment contract.

The Howey test describes an “investment contract” as a contract or scheme that involves each of the following elements:

• first, there must be an investment of money: the investor must give up some tangible and definable consideration;

• second, there must be a common enterprise: the investor’s fortunes must be interwoven with those of other investors (so-called horizontal commonality) and/or the efforts of the promoter of the investment (so-called vertical commonality);

• third, the investor must have a reasonable expectation of profits: the investment must be purchased with the reasonable expectation that the value of the investment will increase or that the investor will receive earnings from the investment; and

• fourth, the investor’s expectation of profits must be based predominantly upon the entrepreneurial or managerial efforts of the promoter or other third parties. [5]

Howey Prong #1: Investment of Money

The first prong of the Howey test is met in the case of an offer and sale of an asset if the asset is purchased or otherwise acquired in exchange for value. [6]  As the SEC explained in The DAO Report, “[i]n determining whether an investment contract exists, the investment of ‘money’ need not take the form of cash” and “in spite of Howey’s reference to an ‘investment of money,’ it is well established that cash is not the only form of contribution or investment that will create an investment contract.” [7] Similarly, courts have interpreted purported gifts of equity as security offerings where such a gift “disperses corporate ownership and thereby helps to create a public trading market.” [8] Confusingly, the SEC has used this framework to go as far as interpreting entirely free and permissionless “airdrops” of digital assets, directly distributed to the accounts of recipients for no consideration, as an “investment of money” on the part of the airdrop recipients if the airdrop is made with the intent of widely disseminating and promoting the tokens. [9]

In light of this precedent, it seems that the first Howey prong is clearly met with regard to the much-maligned Taylor Swift tickets. First, the “whitelisting” process for the ticket sales was not done through a “fair launch” mechanism, in which tokens (or tickets, in this case) are sold to all participants on equal terms, as is often the case in the digital asset industry. [10] Instead, many of those who purchased tickets in the pre-sale were given a “participation code” based on a pre-sale snapshot of specific, seemingly unrelated products that they had purchased; for example, Capital One cardholders could participate in the pre-sale as Capital One is the national presenting partner of the Eras Tour, leading industry observers to be concerned about the same type of collusion that was largely responsible for the FTX/Alameda implosion. [11] Secondly and perhaps most importantly, the pre-sale tickets were purchased for money, in the form of “fiat petrodollars,” making it hard to argue that no money was invested in the tickets.

Howey Prong #2: Common Enterprise

The federal circuit courts have developed two different interpretations of the “common enterprise” factor of the Howey test, one requiring “horizontal commonality” and the other requiring “vertical commonality.”  For horizontal commonality to exist, parties must have pooled their money to fund a venture in which they will share profits and losses on a pro rata basis. “Vertical commonality” considers the link between the fortunes of investors and promoters.

In the case of the “Swfities” and their highly-coveted concert tickets, there appears to be horizontal commonality based on the “floor price” of the tickets. The fever pitch surrounding the tickets, and the increasingly FOMO-driven sticker price in the secondary markets benefits ticketholders pro rata. The vertical commonality component of the second Howey prong also seems to be met in two different ways: First, Ticketmaster, with the concert promoters’ consent, allows ticketholders to resell the tickets on its own website and collects a service fee from doing so such that it benefits from and facilitates the creation of a secondary market for these tickets. [12] Second, the level of demand for and the price for which the pre-sale tickets are resold impact the price that Ticketmaster, Taylor Swift, and the concert promoters can extract from buyers at the general public sale (which in this case did not ultimately occur but was planned to occur), such that if the concert is well-promoted this will benefit both the pre-sale holders and the promoters, Ticketmaster, and Taylor Swift.

Howey Prong #3: Reasonable Expectation of Profits

To constitute a “reasonable expectation of profits” under Howey, profits must come in the form of “capital appreciation resulting from the development of the initial investment . . . or a participation in earnings resulting from the use of investors’ funds,” [13] including “dividends, [and] other periodic payments.” [14] Conversely, according to the Supreme Court’s 1957 decision in United Housing Foundation, Inc. v. Forman, “when a purchaser is motivated by a desire to use or consume the item purchased . . . the securities laws do not apply.” [15] However, it is not necessary for the asset in question to have no consumptive utility in order to meet the third prong of the Howey test. To the contrary, in the recent decision SEC v. LBRY, Inc., in which the Commission crushed the hopes and dreams of “utility token” promoters everywhere, the court noted that “[n]othing in the case law suggests that a token with both consumptive and speculative uses cannot be sold as an investment contract” and that evidence that “purchases were made with consumptive intent” does not negate a finding that the token was sold as investment contract. [16] According to the court, even the “subjective intent of the purchasers” has only little bearing on whether or not the sale of a token was a securities offering. [17] Rather, in the LBRY case, the court found that the sale of an in-app digital token with several extant consumptive use cases within the app at the time of its public distribution nonetheless constituted a securities offering because the company “at key moments and despite its protestations [had] been acutely aware of [the tokens’] potential value as an investment. And it made sure potential investors were too.” [18] The court went on to note that the promotional materials of the LBRY issuer highlighted the token’s large market capitalization, that the management team promised that “the long-term value proposition of [the token was] tremendous, but also dependent on [the management team],” and encouraged holders of the token to “hold onto [their token] (or spend it to buy some of [LBRY’s] great content ....)” despite depreciation. [19] However, the court also emphasized that “even if [LBRY] had never explicitly broadcast its views on the subject, any reasonable investor who was familiar with the company's business model would have understood the connection” between the “grow[th] in value” of the token and LBRY’s “managerial and entrepreneurial efforts.” [20] Thus, although the case was bolstered by the comments of LBRY, the company’s main problem was that “a reasonable purchaser of [the token] would understand that the tokens being offered represented investment opportunities - even if LBRY never said a word about it.” [21]

In the wake of the broad sweep of the LBRY ruling, it is highly likely that the Commission could take the position that both the ticket and participation code sales meets the third Howey prong. Ticketmaster and the concert promoters were undoubtedly aware of the investment opportunity presented by buying the tickets in the presale. In Ticketmaster’s own words, typically about “20–30% of [pre-sale] inventory end up on secondary market.” [22] Moreover, the prices in these markets are astounding with tickets to the Taylor Swift tour reaching $28,000 on some secondary markets and being listed within minutes of being sold in the pre-sale, raising the question as to whether these tickets could plausibly provide $28,000 worth of consumptive utility value to hypothetical concertgoers. [23] Ticketmaster’s business model is predicated on this increase of price in the secondary market; it “holds back as many as 90% of the tickets for the secondary market—credit card companies, promoters, radio stations, or artists’ fan clubs.” [24] In fact, there are reports that Ticketmaster actively colludes with scalpers (or, as they are referred to in the crypto undustry, “market makers”) in the secondary market, with one company employee stating, “[w]e’ve spent millions of dollars on [the resale tool]. The last thing we’d want to do is get brokers caught up to where they can’t sell inventory with us. We’re not trying to build a better mousetrap.” [25] Given the LBRY’s focus on the economics of the business and whether a reasonable investor would understand the value proposition of purchasing the tokens, regardless of any extant utility, it seems equally clear that a typical purchaser of either the participation code or the pre-sale tickets is well aware that these tickets will appreciate in the secondary market, that such appreciation is a function of the tour promoters’ efforts and that the very design of Ticketmaster serves to facilitate such re-sale. That some purchasers do buy the tickets merely to enjoy the consumptive utility of the concert does nothing, in the words of the LBRY decision, to “suggest[] that [such ticket] cannot be sold as an investment contract.”

Howey Prong #4: Entrepreneurial or Managerial Efforts of Others

For an instrument to be an investment contract under Howey, “the efforts made by those other than the investor [must be] the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.” [26]

Where purchasers of an asset have been found to rely upon the “essential managerial efforts of others” for Howey purposes, courts have required that there be particular others upon whom the purchasers relied.  For example, where a group of investors purchased cattle in order to obtain a tax deduction, the Fifth Circuit held the arrangement to be an investment contract because the investors “entered into the agreements with the expectation of profits to come solely from the efforts” of the consulting company promoting the arrangement. [27] Similarly, when the Seventh Circuit found that investors in whiskey interests had purchased securities, it noted that the investors had “entrusted the promoters with both the work and the expertise to make the investment pay off.” [28]

In contrast, the federal courts have held this Howey element was not fulfilled where investors relied instead upon market movements to realize their investment.  For example, in SEC v. Belmont Reid & Co., [29] a gold mining company sold gold coins to investors on a pre-payment basis.  The Ninth Circuit held the buyers were not relying upon the efforts of the seller but instead “speculating in the world gold market.” [30] The court acknowledged that the buyers relied upon the seller’s ability to mine gold successfully in order to deliver the gold coins, but such reliance was no different from “any sale-of-goods contract in which the buyer pays for advance delivery and the ability of the seller to perform is dependent, in part, on both his managerial skill and some good fortune.” [31]

On the other hand, amidst the “ICO boom” of the 2017 halvening epoch, the SEC reasoned that even where tokenholders enjoyed governance rights that could theoretically decentralize managerial decisionmaking away from the efforts of issuers or promoters, the essential entrepreneurial or managerial efforts of others were implicated in the form of so-called “curators” who could the determine the order and frequency of proposals to be voted on and could impose their own subjective criteria for whether the proposal should be whitelisted for a vote. [32] Of particular note to the Commission was the fact that many of these ICO tokens offered the promise of consumptive utility or distributed governance with regard to technological platforms that did not exist, and that required the efforts of the promoter or issuer in order to come into existence. [33]

Much as would be the case in a typical ICO, buyers of participation codes and pre-sale tickets buyers for Taylor Swift’s upcoming concert are buying an asset that offers speculative future “utility” in the form of a concert that has not yet occurred, and that requires the effort of ticket promotors in order to succeed, and in the meantime appear to be betting on the popularity of the tickets in the secondary market. These “pre-mine” ticketholders have no governance rights, and therefore no control over the level of promotion that such concert will receive or the quality of the preceding concerts, which will impact subsequent ticket prices, such that they are led to believe they may put their faith in the promotional efforts of Taylor Swift’s tour promoters and Taylor Swift’s talent as a performer, a particular group of individuals, in order for their tickets to be worth more in the secondary market, and unfortunately, in contrast to SAFT-investors of the 2017–2018 era, they do not have the right to convert their investments back into the petrodollars from whence they came.

Therefore, in light of the unfavorable jurisprudence and regime of regulation-by-enforcement that the Commission uses to effectively carry out its dual mandates of investor protection and capital formation in the digital asset space, we recommend that the issuers and promoters of the Taylor Swift tickets take Chairman Gensler up on his offer to “come in and register” in “some capacity” with the Commission in order to be able to participate in the robust market for publicly-traded digital asset securities. [34] Of course, this may require Ticketmaster to get an ATS license, Bitlicense, Broker/Dealer License, Money Transmitter License, and Qualified Custodian Status (we’re sure they won’t mind) and could negatively impact the liquidity pools for the Swifties’ tickets in SpookySwap (who needs DeFi anyway), but this is a relatively small price to pay for he robust investor protections that crypto market participants have enjoyed this year.

[1]  Alexandra Ocasio Cortez (@AOC), Twitter (Nov. 15, 2022, 1:35 PM), https://twitter.com/AOC/status/1592587226801934336.

[2]  See Julian Mark, Taylor Swift’s Ticketmaster meltdown: What happened? Who’s to blame?, Wash. Post (Nov. 18, 2022, 7:34 PM), https://www.washingtonpost.com/business/2022/11/18/ticketmaster-taylor-swift-faq/.

[3] Despite differences, the Supreme Court has indicated that the definitions of “security” under the Securities Act and the Exchange Act are treated the same. SEC v. Edwards, 540 U.S. 389, 393 (2004), citing Reves v. Ernst & Young, 494 U.S. 56, 61 n.1 (1990).

[4]  SEC v. W.J. Howey Co., 328 U.S. 293, 301 (1946).

[5]  Id. at 301 (“The test [for an investment contract] is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others.”); see also Int’l Bhd. of Teamsters, Chauffeurs, Warehousemen & Helpers of Am. v. Daniel, 439 U.S. 551, 558-562 (1979); Edwards, supra note 1, 540 U.S. at 393.

[6]  See Framework for “Investment Contract” Analysis of Digital Assets, Sec. Exch. Comm’n https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets#_edn9 (last modified Apr. 3, 2019).

[7] Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO, Exchange Act Rel. No. 81207, at 11 (July 25, 2017) (citation omitted) (“The DAO”).

[8]  See SEC v. Sierra Brokerage Servs., Inc., 608 F. Supp. 2d 923, 940 (S.D. Ohio 2009), aff’d, 712 F.3d 321 (6th Cir. 2013).

[9]  In a recently filed complaint, the SEC emphasized that an airdrop unaccompanied by any restriction on the resale of tokens coupled with an active effort by the issuer to create a secondary market for the tokens, such as working to have the tokens listed on an exchange, increase the likelihood that such airdrop will be interpreted as a securities offering. See Complaint at 13, SEC v. Hydrogen Tech. Co., 1:22-cv-08284 (S.D.N.Y. 2022).

[10]  See e.g., Messari, https://messari.io/asset/pangolin/profile (“The PNG native governance tokens has a fair launch. No token is distributed to the team, advisors, Ava Labs or any other organization or entity. The entire token supply is earmarked for the community.”)

[11]  See Zoe Mallin*, How to get presale tickets for Taylor Swift’s The Eras Tour through Capital One*, CNBC (Nov. 1, 2022), https://www.cnbc.com/select/how-to-get-presale-tickets-taylor-swift-tour/.

[12]  See Mark, supra note 2.

[13]  United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 852 (1975) (citations omitted).

[14]  Edwards, 540 U.S. at 394.

[15]  421 U.S. 837, 852–53 (citations omitted).

[16]  2022 WL 16744741 (D.N.H. Nov. 7, 2022), at *7.

[17]  Id.

[18]  2022 WL 16744741 (D.N.H. Nov. 7, 2022) at *1, *4.

[19]  Id. at *4–5.

[20]  Id. at *6.

[21] Id.

[22] Taylor Swift The Eras Tour Onsale Explained, Ticketmaster, https://business.ticketmaster.com/business-solutions/taylor-swift-the-eras-tour-onsale-explained/.

[23]  See Mark, supra note 2.

[24]  https://time.com/6207167/ticketmaster-ticket-prices-expensive-backlash/, https://www.cnbc.com/2022/11/15/taylor-swift-eras-tour-presale-extended-by-ticketmaster.html

[25]  Jem Aswad*, Ticketmaster Accused of Colluding With Scalpers*, Variety (Sep. 19, 2018, 1:31 PM), https://variety.com/2018/biz/news/ticketmaster-accused-of-colluding-with-scalpers-1202948864/.

[26]  SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 482 (9th Cir. 1973).

[27]  Long v. Shultz Cattle Co., 881 F.2d 129, 134 (5th Cir. 1989).

[28]  Glen-Arden Commodities, Inc. v. Costantino, 403 F.2d 1027, 1035 (2d Cir. 1974) (sale of whiskey warehouse receipts was a security because buyers relied upon the seller’s skill in selecting the whiskey in order to realize any profit and upon the seller’s promise to buy back any unsold whiskey).

[29]  794 F.2d 1388 (9th Cir. 1986).

[30]  Belmont Reid & Co., 794 F.2d at 1391 (holding contract to sell gold for future delivery was not a security because the buyers’ profits depended upon the world gold market and not any particular skill of the seller).

[31] Id.

[32]  The DAO, at 13.

[33]  See https://www.howeycoins.com/

[34]  See https://blockworks.co/news/gensler-crypto-intermediaries-must-register-with-sec-in-some-capacity