December 5, 2018

Crypto: SEC Tries the “Dutch Uncle” Approach

Some crypto fans are a little exasperated with the SEC’s approach to digital assets. Well, it looks like the feeling is kind of mutual – check out the “Statement on Digital Asset Securities Issuance & Trading” that Corp Fin, IM & Trading & Markets jointly issued last month. This excerpt gives you a sense of the Statement’s “Dutch Uncle” tone:

The Commission’s Divisions of Corporation Finance, Investment Management, and Trading & Markets (the “Divisions”) encourage technological innovations that benefit investors and our capital markets, and we have been consulting with market participants regarding issues presented by new technologies. We wish to emphasize, however, that market participants must still adhere to our well-established and well-functioning federal securities law framework when dealing with technological innovations, regardless of whether the securities are issued in certificated form or using new technologies, such as blockchain.

The Commission’s recent enforcement actions involving AirFox, Paragon, Crypto Asset Management, TokenLot, and EtherDelta’s founder, discussed further below, illustrate the importance of complying with these requirements.

The Statement walks through each of these enforcement proceedings – which involve ICOs, digital asset investment vehicles & secondary market trading platforms – in some detail, but its message can be summarized briefly: “We don’t want to crush innovation, but the securities laws apply to a lot of what you’re doing. If you don’t comply with those laws, we’ve got a problem – and so do you.”

A “Dutch Uncle” is firm but benevolent – and despite the Statement’s firm tone, Corp Fin showed a little benevolence toward wayward ICO issuers.  The 2 ICO settlements referenced in the Statement addressed failures to register offerings under the Securities Act – and the Statement notes that the settlement terms lay out a path to compliance, “even where issuers have conducted an illegal unregistered offering of digital asset securities.”

But the path to compliance isn’t easy – and includes registering the securities under the Exchange Act. This Steve Quinlivan blog blog points out that registration presents some unique challenges for coin issuers:

The second step is to register the coins on Form 10 under the Exchange Act. A daunting task maybe, given little is known how to register coins. You will probably need audited financial statements and all that stuff. Then there are those pesky 34 Act reporting obligations which will follow such as 10-Ks, 10-Qs and 8-Ks. I wonder how Section 16 applies and who has to report.

The better answer for ICO issuers is to get it right the first time, and not have to jump through all sorts of hoops to fix a screw-up. And there’s some indication that many are trying to do that – at the ABA’s Fall meeting, Corp Fin Director Bill Hinman remarked that roughly a half-dozen ICO S-1s & a dozen Reg A filings are currently being reviewed by Corp Fin on a confidential basis.

Meanwhile, SEC Enforcement’s Cyber Unit recently bagged a couple of celebrities.  Boxer Floyd Mayweather & music impresario DJ Khaled recently settled SEC enforcement proceedings alleging that they unlawfully touted ICOs on social media without disclosing that that they were being paid.

Crypto: The SEC Takes an “L” in Token Injunction Bid

As the Digital Asset Statement suggests, the SEC has taken a strong position that token offerings generally involve securities in the form of an “investment contract.” As Liz recently blogged, at least one federal court has been sufficiently persuaded of the merits of that position to deny a defendant’s motion to dismiss criminal charges premised on tokens’ status as securities.

But you can’t win ’em all – and the SEC found that out last week when a federal court in California refused to grant a preliminary injunction against a company engaged in a token deal.  This excerpt from a recent Fenwick & West memo says that when it came to the status of the token in this case as a security, the court wasn’t buying what the SEC was selling:

On Tuesday, November 27, Judge Gonzalo Curiel of the Southern District of California issued the first opinion rebuffing the SEC under the Howey test. In denying the SEC’s motion for a preliminary injunction — after initially granting a temporary restraining order — the court held that the commission had not provided enough information to deem Blockvest’s token a security.

The decision on this motion is just part of the lawsuit’s opening act, & the memo points out that it is based mainly on the parties’ differing factual accounts of what information the limited number of token purchasers relied upon. But it does suggest that courts aren’t necessarily going to roll over for the SEC’s Howey arguments in each new case.

Crypto: NASAA Tries Cartoons to Stop the Scams

Despite efforts to educate investors about the variety of crypto-scams, a lot of people are still getting ripped-off.  This Keith Bishop blog says that NASAA has taken a new tack to educate investors about cryptocurrency investment risks – a series of cartoons:

For those still in the dark about cryptocurrency, the North American Securities Administrators Association (aka NASAA) has released an animated video on the subject.  According to NASAA, the video “focuses on concerns individuals should consider before investing in any crypto-related offering, including the three “U’s” (untraceable, uninsured, unregulated), volatility and liquidity risks, and the very real potential for fraud.”  This video is actually a sequel to the debut video “Get in the Know about ICOs”.

These aren’t exactly “Rick & Morty” or “BoJack Horseman” when it comes to entertainment value, but check them out – you might learn something.

John Jenkins