November 12, 2021

SEC Seeks to Halt 1934 Act Registration of Tokens

The ongoing regulatory push and pull over digital tokens just took another strange turn. On Wednesday, the SEC announced that it had instituted administrative proceedings under Section 12(j) of the 1934 Act to halt the effectiveness of a Form 10 filed to register two tokens under Section 12(g) of the 1934 Act. The Form 10 that is the subject of the proceeding is one of a bizarre group of filings made by American CryptoFed DAO LLC.

As you may recall, Form 10 is a registration statement form that an issuer can use to, among other things, voluntarily register a class of equity securities under Section 12(g) of the 1934 Act, and it goes effective by lapse of time after 60 days. As with other registration statements, the Staff in Corp Fin reviews Form 10 registration statements; however, unlike 1933 Act registration statements such as Form S-1, the rules governing Form 10 do not provide for a “delaying amendment” that will delay the effectiveness of the registration statement until the Staff acts to accelerate the effectiveness. As a result, the Staff will typically request that an issuer withdraw the Form 10 prior to going effective and then refile the Form 10 when the issuer responds to the Staff’s comments.

American CryptoFed made a series of filings with the SEC beginning in mid-September 2021. It filed the Form 10 and a Form S-1, as well as several free writing prospectuses. The registration statements purport to register two digital tokens issued by American CryptoFed – called the “Ducat” and “Locke” tokens. Both registrations statements state the nonsensical notion that the issuer is registering the tokens with the SEC as utility tokens, not as securities. The Form 10 also addresses how the issuer intends, upon effectiveness of the Form 10, to distribute one of the tokens to a variety of entities through a registration statement on Form S-8. The disclosure in the Form 10 opens with the statement:

American CryptoFed DAO, LLC (“CryptoFed”) agrees with commissioner Hester M. Peirce of U.S. Securities and Exchange Commission (SEC) that the SEC is a “disclosure regulator, rather than a more interventionist merit regulator.” “The SEC’s Division of Corporation Finance may examine a company’s registration statement to determine whether it complies with our disclosure requirements. But the SEC does not evaluate the merits of offerings, nor do we determine if the securities offered are “good” investments.” [footnotes omitted]

According to the SEC’s order, the Corp Fin Staff spoke with the issuer about the Form 10 on October 4, advising the issuer that there were serious deficiencies with the filings. On October 6, 2021, American CryptoFed filed a document that purported to be an amended Form 10, consisting of a cover page and several paragraphs asserting that the Ducat and Locke tokens were not securities. “Bedbug” letters on the Form 10 and the Form S-1 were sent on October 8. The Form 10 was not withdrawn, and as a result it would have gone effective on Monday, November 15 absent the Commission’s action. The SEC notes in the order instituting the Section 12(j) proceedings that because the Form S-1 contains a delaying amendment, the Commission was not instituting proceedings with respect to that registration statement.

The SEC alleges that the Form 10 fails to contain many of the disclosures required by the form (such as financial statements, MD&A, description of business, description of securities, beneficial ownership), and included materially misleading information concerning the issuer’s intended distribution of the Locke token using Form S-8.

The effectiveness of the Form 10 is stayed pending the proceedings, and the case will be assigned for a hearing by an SEC administrative law judge.

– Dave Lynn