October 28, 2019

ICOs: “SAFTs” No Longer Safe?

When I first saw this announcement from the SEC’s Enforcement Division about an emergency action to halt an unregistered ICO, I brushed it off as a takedown of yet another fraudulent “crypto” company. But this column from Bloomberg’s Matt Levine points out that this one is different.

In Matt’s words, the company here was doing the “best-practices-y thing” that had been blessed by several law firms. Its offering was structured as a “Simple Agreement for Future Tokens” – as John blogged last year, that’s an approach – based on the popular “SAFE” template for startup financing – that was starting to take off for Reg D token deals. Matt’s explanation of how it works:

1. Sell something—call it a “pre-token”—to accredited investors (institutions, venture capitalists, etc.) to raise money to build your platform. Concede that the pre-token is a security.

2. When the platform is built, it will run on a token, a cryptocurrency that can be used for transactions on the platform and that is not a security.

3. At some point — at or after the launch of the platform — the pre-token (the security) flips into the token (the non-security), and all the people who bought pre-tokens to finance the platform now have tokens to use on it. (Or to sell to people who will use them.)

This seems to honor the intention of securities law—you’re not selling speculative investments to retail investors to fund the development of a new business—while also honoring the intention of the ICO: Your platform is financed (indirectly, eventually) by the people who use it; the people putting up the money do so not in exchange for a share of the profits but for the ability to participate in the platform itself. In this model the pre-token will be called something like a “Token Purchase Agreement” or “Simple Agreement for Future Tokens”: It’s a security wrapper for the eventual utility token.

Unfortunately, the SEC’s complaint took issue with the fact that when the “pre-tokens” here were scheduled to flip into tokens, there would be no established ecosystem for them to trade as currency. Which would seem to be an obvious side-effect of financing a new form of cryptocurrency?

We’re not really sure what to make of this yet – there were some reports that early investors in this offering were flipping their tokens right away, which would be a problem in the SEC’s view. Matt also suggests that maybe the SEC would be more amenable if the pre-tokens didn’t flip until the ecosystem is running robustly. But probably not. John blogged recently on “The Mentor Blog” about how to do a Reg A token offering. So perhaps anyone considering an ICO should take a look at that…

“Reg D” ICOs: What’s the Harm in Trying?

This MarketWatch article notes there’s been a steep drop-off in the number of Reg D token offerings this year. If the Enforcement Division taking issue with a SAFT isn’t enough to put companies off that approach, keep in mind that the remedies in these actions go beyond just halting the current offering:

Until September 30, 2019, SEC enforcement actions in the crypto industry conveyed a consistent message: most crypto is a security, and if a token issuer does not follow the registration requirements of the 1933 Act, the issuer would face significant consequences in the form of substantial penalties, a mandated rescission offer to US investors, a requirement to register the tokens under Section 12(g) of the 1934 Act, and bad actor disqualifications preventing the issuer from future Regulation A and Regulation D offerings.

That’s the intro from this Wilson Sonsini memo – but it does note a recent “aberration” on the remedies front:

On September 30, the SEC announced a settlement with that did none of these things. Despite finding that issued tokens that were securities in the United States without complying with registration requirements of the 1933 Act, the SEC: imposed a financial penalty on that was minor in the context of the total size of’s capital raise; did not require to make a rescission offer to investors; did not require to register its tokens under the 1934 Act; and did not impose bad actor disqualifications under Regulation A and Regulation D.

And, as discussed below, the Settlement Order omitted any mention of key factual information necessary to support the SEC’s conclusion that the tokens were in fact securities. Equally surprising, the SEC did not address, in any respect, whether new tokens issued being used on a blockchain supported by are securities, and the SEC took no action (and offered no discussion) with respect to the issuance of those tokens.

What are we all to make from these mixed messages? This Eversheds Sutherland memo says that the most we can take away is that the SEC is evaluating facts in settlement proceedings on a case-by-case basis. If you’re doing an unregistered token offering right now, go document some good facts!

Coming Soon: 2020 Executive Compensation Disclosure Treatise

We just wrapped up “Lynn, Borges & Romanek’s 2020 Executive Compensation Disclosure Treatise” — and it’s been sent to the printers. This Edition includes updates to disclosure examples, info about the evolving link between ESG topics & executive pay, and a brand new chapter on hedging policy disclosure. All of the chapters have been posted in our “Treatise Portal” on

How to Order a Hard-Copy: Remember that a hard copy of the 2020 Treatise is not part of a membership so it must be purchased separately. Act now to ensure delivery of this 1710-page comprehensive Treatise as soon as it’s done being printed. Here’s the “Detailed Table of Contents” listing the topics so you can get a sense of the Treatise’s practical nature. Order Now.

Liz Dunshee