# Why Vaultfire Bonds Are Not Securities

**Status:** Internal positioning document. Not legal advice. Not for public
distribution. Intended as the first document handed to an enterprise legal
team requesting a securities analysis.

**Last updated:** April 2026
**Author:** Vaultfire Protocol team
**Contact:** ghostkey316@proton.me

---

## TL;DR

Vaultfire bonds are **performance collateral**, not investments. An agent
posting a bond is not buying a financial instrument; it is staking its own
capital against a specific operational promise. The bondholder is the agent
itself, the counterparty receives a payout only on harm or appreciation
realized, and there is no common enterprise on whose efforts the bondholder
depends for profits. Under the Howey test, the typical Vaultfire bond fails
prongs (1), (3), and (4). Under the Reves "family resemblance" test for
notes, the closest analog is collateral securing a service obligation, which
courts have consistently treated as outside securities law.

This document is a starting position for a real legal review, not a final
opinion. We expect a securities lawyer to challenge it. Where it overstates,
we will revise it.

---

## What a Vaultfire bond actually is

There are two bond types:

### 1. Accountability Bond (`AIAccountabilityBondsV2.sol`)

An AI agent locks its own ETH (or chain-native token) in a smart contract
before performing a task for a human counterparty. At resolution, the
contract reads a flourishing metric (signed, oracle-verified) and computes
an `appreciation` value:

- **Negative appreciation** (the human was harmed): the human is paid the
  loss back from the bond. The agent does not receive a return.
- **Positive appreciation** (the agent delivered well): the human still
  receives the upside; the agent recovers its bond and may receive a share
  of the gain only if a yield pool covers it. There are explicit caps on
  agent profit (30% / 50%) enforced at the contract level. A "domination
  penalty" sends 100% to the human under specific conditions.

The agent posting the bond is **the bond's owner** for the duration of the
task. It is not pooled with other agents' bonds for collective investment.
There is no expectation that the protocol team will generate returns for
bondholders. The agent's own performance is the only determinant of
recovery.

### 2. Partnership Bond (`AIPartnershipBondsV2.sol`)

Two agents collaborating on a task each post collateral. If one agent
defaults on its agreed obligations, the contract redistributes the bond to
the non-defaulting party. This is a **mutual performance bond**, not unlike
a surety bond between contractors.

---

## Howey Test analysis

Howey test (SEC v. W.J. Howey Co., 328 U.S. 293):
A security exists when there is **(1)** an investment of money **(2)** in a
common enterprise **(3)** with an expectation of profits **(4)** to be
derived from the efforts of others.

### Prong 1: Investment of money — *Likely met*

The agent does invest capital (ETH or chain-native token) when posting the
bond. We do not contest this prong. ✓

### Prong 2: Common enterprise — *Likely not met*

There is no horizontal commonality between bondholders. Each bond is
ringfenced to a specific task between specific parties. Pooling, if any,
exists only in a yield pool that smooths cash flow for the protocol; the
bond itself is not pooled with other bonds. There is no vertical commonality
either: the agent's recovery depends on its own performance, not on the
fortunes of the protocol team. ✗

### Prong 3: Expectation of profits — *Not met for accountability bonds*

The agent's primary motivation in posting an accountability bond is to make
its operational promise credible to the human counterparty. The agent
recovers its bond only if it performs the task correctly. The structure is
designed so that on harm, the agent loses; on neutral performance, the
agent breaks even (minus gas); on positive performance, the upside flows
predominantly to the human, with capped agent participation only if a
separate yield pool can cover it.

A rational party posting an accountability bond is not doing so to earn a
return on capital. They are doing so to access the market for paid agent
services at all. The bond is the entry ticket, not the investment vehicle. ✗

### Prong 4: Profits derived from the efforts of others — *Not met*

The agent's recovery is determined entirely by:
- Its own performance
- The signed flourishing metrics submitted by oracles (a deterministic
  median consensus, not a discretionary management decision)
- The dispute resolution panel, only if invoked

The Vaultfire team does not actively manage bondholders' positions, does
not promise returns, and does not have discretion over individual bond
outcomes. ✗

**Conclusion:** Three of the four Howey prongs likely fail for the typical
accountability bond.

---

## Reves "family resemblance" test (for note-like instruments)

If a regulator or a court argues a Vaultfire bond is more analogous to a
note than a Howey investment contract, the Reves test (Reves v. Ernst &
Young, 494 U.S. 56) applies. Reves presumes a note is a security unless it
"bears a strong family resemblance" to one of several enumerated
non-securities. The closest analog for Vaultfire bonds is:

- **"Notes evidencing collateral or security."** Performance bonds posted
  by contractors, sureties, and licensees fall in this category and are
  consistently outside securities law.

The four Reves factors:

1. **Motivations of buyer and seller.** The agent's motivation is access
   to a service market, not investment return. The protocol's motivation is
   to make the market function. Neither party characterizes the bond as an
   investment. **Favors non-security.**

2. **Plan of distribution.** Bonds are posted task-by-task, between
   specific parties. There is no broad distribution to passive investors.
   The bond is not transferable as a generic instrument. **Favors
   non-security.**

3. **Reasonable expectations of the public.** The public-facing materials
   describe bonds as "skin in the game" and "bail money" — explicitly
   non-investment framing. The /demo, /how-resolution-works, and /security
   pages all describe operational mechanics, not financial returns.
   **Favors non-security.**

4. **Risk-reducing factors.** The bond is not held in a fund managed by the
   protocol. The contract code is open-source and verifiable on-chain.
   Distribution math is deterministic. **Favors non-security.**

---

## What this position does *not* claim

We do **not** claim:

- That every imaginable use of a Vaultfire bond is outside securities law.
  A pooled product layered on top of bonds (e.g., a tokenized "bond yield
  fund") would be a separate analysis and likely a security.
- That this analysis applies in non-US jurisdictions without local review.
- That the protocol team has obtained a no-action letter or formal SEC
  guidance.
- That an enforcement-minded regulator could not bring a case anyway. We
  believe we would prevail on the merits; we do not promise we would not be
  sued.
- That this document substitutes for the legal opinion of a securities
  lawyer retained by the counterparty.

---

## Operational practices that support the position

These are practices we already follow and intend to maintain. They support
the non-security characterization and we should not regress on them
without legal review.

- ✅ Bonds are posted task-by-task, not as a pooled investment product.
- ✅ Bond contracts are open-source and verifiable on-chain.
- ✅ The agent posting the bond is the entity that recovers it; bonds are
  not transferable as bearer instruments.
- ✅ Public marketing materials describe bonds as collateral / "skin in the
  game," never as investments or yield-bearing positions.
- ✅ Agent profit is capped at the contract level (30% / 50% caps,
  domination-penalty 100% to human).
- ✅ The protocol does not promise returns to bondholders.
- ✅ The /security page and /how-resolution-works page disclose
  limitations and the unfunded state of third-party audits, with no
  forward-looking financial promises.

If we ever build a layered product (tokenized fund, pooled yield, etc.),
treat it as a separate securities analysis from the start.

---

## What to give to a lawyer

When an enterprise legal team requests a securities position:

1. This document.
2. Source contracts (linked from /security and on GitHub):
   - `contracts/AIAccountabilityBondsV2.sol`
   - `contracts/AIPartnershipBondsV2.sol`
   - `contracts/FlourishingMetricsOracle.sol`
   - `contracts/MultiOracleConsensus.sol`
   - `contracts/VaultfireDisputeResolution.sol`
3. The /security page (link: https://theloopbreaker.com/security)
4. The /how-resolution-works page (link:
   https://theloopbreaker.com/how-resolution-works)

The goal is to make the lawyer's job small: hand them the analysis, the
code, and the disclosure pages, then ask what they would change.

---

## Honest caveats

- This document was drafted by the protocol team, not by a securities
  lawyer. It reflects our best-effort understanding of US securities law
  as applied to performance collateral. It is meant to *start* a legal
  review, not end one.
- The protocol has not been registered with the SEC, has not obtained a
  no-action letter, and has not been reviewed by FinHub or the strategic
  hub for innovation.
- Securities classification is a fact-specific inquiry. A lawyer reviewing
  a specific deployment of Vaultfire bonds in a specific business context
  may reach a different conclusion. We will respect that conclusion and
  adjust accordingly.

---

*Making human thriving more profitable than extraction.*
