The U.S. Securities and Exchange Commission (SEC) plans to clarify when securities laws might apply to crypto token sales, an official said Friday.
In a speech at the University of Missouri School of Law, Hester Peirce, one of the SEC’s commissioners, said that the agency’s staff are working on “supplemental guidance” to help projects determine “whether their crypto-fundraising efforts fall under the securities laws.”
While the Howey test – the U.S. standard for determining whether something is a security – generally provides clarity, she said, there is a “need to tread carefully” as token offerings do not always resemble traditional securities offering.
For instance, capital raised from decentralized token offerings could mean it is not truly owned or controlled by a company or person, unlike with traditional securities which are controlled by issuers or promoters, Peirce explained, citing a report from Coin Center.
The application of Howey test can also be “overly broad,” the commissioner added. She did not provide an idea as to when the guidance might be issued.
In November 2018, William Hinman, SEC director of corporation finance, also said that the regulator intends to release “plain English” guidance for developers on when and how crypto tokens may be classified as securities.
On the subject of cryptocurrency regulations, Peirce continued to say, “ambiguity is not all bad,” and that the delays in bringing regulatory clarity may, in fact, allow “more freedom” for blockchain technology to grow and projects to mature.
The commissioner further said that the SEC is also mulling whether new rules need to be put in place to regulate the crypto space, adding:
“If we act appropriately, we can enable innovation on this new frontier to proceed without compromising the objectives of our securities laws – protecting investors, facilitating capital formation, and ensuring fair, orderly, and efficient markets.”
Peirce argued that the SEC sometimes can be “impulsive” in dealing with crypto project and offerings. “We owe it to investors to be careful, but we also owe it to them not to define their investment universe with our preferences,” she said.
In July 2017, the SEC notably declared that securities laws could apply to some token sales, after an examination of ethereum-based project The DAO, which had collapsed in 2016 losing investors $60 million.
SEC Begins Green-Lighting Token Offerings
The U.S. Securities and Exchange Commission recently made history when it green-lighted two token offerings under Regulation A+. “This is the first time in U.S. history that a crypto token offering has received SEC qualification,” one of the two qualified issuers proclaims.
Historic Event for Crypto Industry
The U.S. Securities and Exchange Commission (SEC) began qualifying token offerings under Regulation A+ (Reg A+) last week. The application by Blockstack PBC was approved on July 10 for Stacks tokens. The other application was approved the following day for Props tokens by Younow, a live streaming app which claims to have 46 million users.
Under the U.S. Securities Act of 1933, companies seeking to offer or sell securities to potential investors must either register the offer and sale or qualify for a registration exemption, such as under Regulation A.
The Jumpstart Our Business Startups (Jobs) Act, signed into law by former President Barack Obama on April 5, 2012, directed the SEC to amend the Securities Act and expand exemptions provided by Regulation A. The resulting final rules, often referred to as Reg A+, were adopted by the commission on March 25, 2015, and became effective on June 19 of the same year. The exemptions are aimed at facilitating small companies’ access to capital. However, the SEC never approved any token issuers’ Reg A+ applications until now.
Muneeb Ali, co-founder of decentralized app ecosystem Blockstack and CEO of Blockstack PBC, announced on July 10 that his company’s “upcoming token offering has been qualified by the SEC under Regulation A+,” elaborating:
This is the first time in U.S. history that a crypto token offering has received SEC qualification. We believe this is a huge step forward for decentralized applications, internet security, and privacy … It is a truly groundbreaking day for decentralized technology.
Ali added that there are currently over 165 applications built on the Blockstack decentralized computing network, including bitcoin-friendly web services such as Dmail, Bitpatron, and Graphite Docs. Blockstack PBC is a technology company that, together with its affiliates, develops an open-source peer-to-peer network using blockchain technologies to build a new network for decentralized applications, the Blockstack network.
The Blockstack team worked with the SEC over the past 10 months prior to qualifying for Reg A+, Ali said on Fyiam Tuesday. Under the Reg A+ framework, the company began conducting a $28 million cash offering on July 11. The sale is open to anyone globally “subject to a small number of geographical restrictions,” the CEO confirmed. Prior to obtaining the Reg A+ qualification, only accredited investors could participate in the company’s 2017 offering under Regulation D.
According to its offering circular filed with the SEC, Blockstack’s current offering is limited to $50 million in Stacks tokens each year. The circular details that Blockstack currently offers 40 million of these tokens to non-U.S. persons in a private placement exempt from the registration requirements under Regulation S. “We plan to continue our offering under Regulation S concurrently with this offering under Regulation A,” the filing notes. Blockstack also intends to offer its tokens to residents of the State of New York. “We have, however, taken the position that the State of New York’s Bitlicense regulatory framework does not apply to the offer and sale of securities like the Stacks tokens,” the filing explains.
Props Project and Younow
The day after Blockstack’s announcement, the Props Project announced that it has also been qualified by the SEC to distribute Props tokens under Reg A+. Its SEC filing states that “A Reg A+ filing would enable us to bring Props to our entire community of users.” The team wrote on July 11:
We are proud to announce that the Props offering statement on Form 1-A has been qualified by the U.S. Securities and Exchange Commission (SEC), enabling us to grant Props to both accredited and unaccredited Props Network users in the United States and around the world.
“This is a landmark moment for our community,” the team continued, adding that Props tokens are now available to registered users of Younow, the first app on the Props Network.
According to Younow’s offering circular filed with the SEC on July 12, Props tokens will be used to reward users of the apps for in-app activities. “As a Tier 2 issuer under Regulation A, we will be subject to scaled disclosure and reporting requirements, and we will not be required to make the same level of public reporting required of issuers in traditional public offerings,” the company elaborated.
Rules and Eligibility
Reg A+ provides for two tiers of offerings. Tier 1 allows securities offerings of up to $20 million in a 12-month period while Tier 2 allows up to $50 million within the same time period. For offerings of up to $20 million, the issuer could elect either tier. Both Blockstack and Younow have opted for Tier 2 offerings. The SEC reiterated:
The updated exemption will enable smaller companies to offer and sell up to $50 million of securities in a 12-month period, subject to eligibility, disclosure and reporting requirements.
Both tiers are subject to basic requirements. However, Tier 2 issuers have additional rules to follow such as providing audited financial statements, filing annual, semiannual and current event reports, and “A limitation on the amount of securities non-accredited investors can purchase … of no more than 10 percent of the greater of the investor’s annual income or net worth.” Furthermore, issuers in Tier 2 offerings are not required to register or qualify their offerings with state securities regulators.
Exemptions under Reg A+ are limited to companies organized in and with their principal place of business in the U.S. or Canada. The exemptions are unavailable for companies that already report to the SEC and certain types of investment companies. Other criteria that could disqualify a company include not having a specific business plan, having been subject to any order of the commission entered within the past five years, or not filing ongoing reports required by the rules during the preceding two years.
Unprecedented: Blockstack Gets SEC Nod for U.S. Public Token Sale
The first token offering to be approved by the U.S. Securities and Exchange Commission (SEC) is coming to America and beyond, courtesy of decentralized computing and dapp firm Blockstack PBC.
Announced by the company’s leadership on July 10th, the approval means Blockstack will begin its public sale of Stacks (STX) tokens in accordance with the regulator’s Regulation A+ framework, an IPO alternative used by startups to raise funds.
The qualification has immediately paved the way for the STX offering to start, the firm said:
“Blockstack will conduct a $28 million cash offering. The token offering will open on Thursday, July 11th […] It will be open to any purchaser who would like to take part in the Blockstack next-generation computing network, subject to a small number of geographical restrictions. This means everyone from general enthusiasts, to longstanding Blockstack supporters, to accredited or non-accredited investors alike […] can participate in the sale.”
Participants will be able to register for the offering through the stackstoken.com portal, where STX will be on sale while supplies last via payments in dollars, bitcoin, or ether. $100 USD or the cryptocurrency equivalent is the minimum purchase amount allowed.
A Page Has Been Turned
For his part, Blockstack chief operating officer Muneeb Ali hailed the SEC qualification as a milestone in the wider cryptoeconomic fight to build a new, better internet:
“By inviting everyone, not just accredited investors, to contribute to Blockstack, we can effectively drive the long-term growth of our vision to build a decentralized computing network that will replace the current, siloed version of the internet with one that is open, fair, and user-controlled.”
In the very least the qualification is a milestone insofar as it is unprecedented in America’s nook of the cryptoverse — no ICO has ever achieved similar SEC approval before, with the Commission having proven to be a daunting chokepoint for U.S. token projects in the past.
As legal expert Katherine Wu explained on Twitter, the development indicates Blockstack has been coordinating with the securities watchdog at length — with the effort now having paid off, if the greenlight is any indication.
Zooming out, Blockstack has provided a blueprint for other token projects keen on bringing their assets into the hands of U.S. investors in full regulatory compliance. The takeaway? Deeply engage with the Commission and its requests (and be a viable project, of course), and you’ll be able to play ball in America.
Now, this isn’t to say that ICO season will come ripping back. But it does show there’s a viable new way to bring token offerings toward the mainstream.
What Is STX?
The Stacks token is the native asset of the Stacks blockchain, which is the heart of the Blockstack network.
In being the platform’s native asset, Stacks tokens work like ether works in Ethereum: as gas to pay for the execution of transactions and smart contract activities. So for those building dapps on top of Blockstack, STX will be used to make those dapps run and help the network’s users manage their data.
Notably, preregistered Blockstack voucher holders who have been approved will be allowed to purchase an initial lot of $3,000 worth of STX at a price of $0.12 per token.
Beyond the 78,333,333 STX set aside for voucher owners, an additional 62,000,000 STX have been earmarked for the token’s general offering valuation of $0.30 and another 40,000,000 for “non-cash consideration,” i.e. to pay for the development of dapps through the Blockstack “App Mining” program.
Of all those tokens, only $50 million worth will be portioned out for retail investors, though that’s $50 million more than what would be allowed in a regular securities offering. Such offerings are open only to accredited investors in the U.S.
Dealing With SEC on Crypto Issues Feels Like ‘Regulatory Version of an Escape Room’, Says Crypto Mom Hester Peirce
The staffs of the Division of Trading and Markets at the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) just released a statement on the custody of digital asset securities by licensed broker-dealers.
The regulators note that digital assets, digital asset securities and related innovative technologies have created a lot of challenges and complex regulatory issues. Notably, when compared with traditional assets such as stocks and commodities, digital assets, including cryptocurrencies and security tokens, are harder to protect.
According to the statement,
“The requirements of the Customer Protection Rule have produced a nearly fifty-year track record of recovery for investors when their broker-dealers have failed. This record of protecting customer assets held in custody by broker-dealers stands in contrast to recent reports of cybertheft, and underscores the need to ensure broker-dealers’ robust protection of customer assets, including digital asset securities.”
As the crypto industry expands, the SEC and FINRA report that more and more companies are seeking to become registered entities that can operate lawfully. These are new applicants as well as existing broker-dealers who are trying to expand into digital assets. In terms of approving various entities seeking to custody digital asset securities in full compliance with the broker-dealer financial responsibility rules, the regulators note that informative discussions are in progress.
While noncustodial activities involving digital asset securities raise fewer concerns, the staffs similarly note that the information-gathering phase is an important step in understanding how to move forward.
“As the market, infrastructure, and law applicable to digital asset securities continue to develop, the Staffs will continue their constructive engagement with market participants and to gather additional information so that they may better respond to developments in the market while advancing the missions of our respective organizations: for the SEC, to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation; and for FINRA, to provide investor protection and promote market integrity.”
“The Staffs encourage and support innovation in the securities markets and look forward to continuing to engage with investors and industry participants as the marketplace for digital asset securities develops.”
Nearly a year ago, crypto supporter and SEC Commissioner Hester Peirce issued an official dissent when the SEC rejected the request for a Bitcoin exchange-traded fund by Cboe Global Markets. Commenting today on the regulators’ seeming inability to move forward, Peirce writes,
“If figuring out how to deal with the SEC on crypto issues feels like a regulatory version of an escape room, here’s the latest clue.”
In circular fashion, Peirce links to the statement issued by the joint staffs.
Crypto lawyer Jake Chervinsky, who serves as general counsel at Compound, a team of engineers and business analysts building an Ethereum protocol for money markets, responds,