Monday, June 18, 2018
I have posted Securities Regulation in Virtual Space on SSRN with the following abstract:
Video games, virtual worlds, virtual reality, and augmented reality are rapidly developing and evolving in exciting ways. As with any technology-related advancement, new legal issues are created as to how to apply and adapt the law. The question regarding the application of federal securities regulation to these virtual realms is an interesting one that has not been addressed.
If securities existing entirely within virtual space are securities for purposes of federal securities law, software developers, platform owners, and users become subject to the registration requirements and anti-fraud provisions of that body of law along with the rest of its provisions. Based upon a strict reading of the definition of a security found within the Securities Act and the Exchange Act, securities can exist entirely within virtual space because investment contracts, a type of security, can be created in such space. However, because the definition sections found in the Securities Act and Exchange Act both begin with the prefatory language “unless the context otherwise requires,” an analysis is required to determine whether these securities should be excluded from the application of federal securities law. Based upon the intended scope of federal securities regulation, various constitutional law principles, and concerns about hindering creativity and regulatory experimentation, the virtual context requires that securities existing entirely within virtual space be excluded from the scope of federal securities regulation.
Various concerns do exist regarding excluding such securities from the application of federal securities law including that that application of federal securities regulation is necessary for investor protection, to prevent an unworkable patchwork of state regulation, and to ensure that these rapidly developing and evolving virtual environments are properly regulated. Ultimately, however, the arguments for excluding such securities from the application of federal securities law outweigh the arguments for applying it.