The Risk of Regulatory Arbitrage: A Response to Securities Regulation in Virtual Space
In Securities Regulation in Virtual Space, Eric. C. Chaffee explores the potential applicability of the securities laws to virtual transactions based on virtual activity and argues that, although many of these transactions likely qualify as “investment contracts” under S.E.C. v. W.J. Howey Co., they should be excluded under the context clause because, among other reasons, application of the securities laws would stifle creativity within this innovative space. This Response proposes a reframing of the Howey test as a response to the risk of regulatory arbitrage, argues that the context clause should only exclude transactions that do not pose such a risk, contends that transactions in virtual space do pose a risk of regulatory arbitrage, and thus concludes that these transactions should not be excluded from the securities laws. In recognition of Professor Chaffee’s compelling argument that securities regulation would hinder creativity within this burgeoning area, this Response argues for a new exemption from registration that would further the policy goals of the securities laws while not stifling innovation in virtual space.