What’s the Back Story to Security Token Offerings and Regulation?

The initial coin offering (ICO) / Security Token Offering (STO) continues to endure a period of regulatory uncertainty. As things stand right now, ICOs are securities. End of story.

If you completed an ICO after the Securities and Exchange Commission (SEC) issued the DAO Report – you are probably in trouble. Hire a good securities attorney and ask the SEC for forgiveness and maybe, just maybe, you may get off with a less punitive judgment from the enforcement division.

As for utility tokens, this is a bit of a Snipe hunt, at least in the US. Do they really exist? Nope – not right now.

For utility tokens to exist and trade on an “exchange,” there will probably need to be a change in securities law. And what are the odds of that? Good question.

STOs, basically regulated securities on blockchain that leverage smart contracts, have a clearer path but there are still issues.

Currently, securities issuers are using Reg CF and Reg D to successfully sell and issue digital assets but the one exemption that many people are excited about, Reg A+, remains in regulatory purgatory.

Not a single filing submitted to the SEC has been qualified – as far as we know. Aspiring Reg A+ issuers have stopped mentioning crypto, blockchain, digital asset, etc. in their filings as it is guaranteed to slam the breaks on any progress for the offering.

And if you want to know about 12g issues – this article is a must-read.

What happens when a digital asset has more than 2000 holders (12g) and it is compelled to become a reporting company? Will the digital sky fall? Perhaps. And that’s a really big problem.

One of the reasons digital assets became popular was for their heightened liquidity. Capping the number of holders can put a damper on that.

Admirably, the SEC has opened its doors to erstwhile crypto-preneurs to stop by and chat. Many aspiring issuers and marketplaces have visited with the Commission to share their ideas and gain insight into regulatory sentiment. Sometimes the response is positive and sometimes the response is downright disheartening … Especially if you want to challenge established finance law with something based off of a distributed ledger.

As for the new SEC Fintech portal where you can submit your questions to public officials. We have heard that responses are slow to come – if they ever come at all – so don’t hold your breath on receiving any feedback. A bit of a policy black hole… that’s too bad.

Crowdfund Insider frequently speaks with crypto-insiders about what is really going on or – what is the chatter. Recently, we had the chance to speak with several industry insiders who are plugged into the inside the beltway process. We posed a series of questions on the policy backdrop which remains a bit fluid.

First, CI asked what needs to be done to get the STO market going in the US? Why have there not been any Reg A+ offerings qualified by the SEC?

More clarity on custody and secondary trading. Right now anyone who wants to do this the right way is hamstrung because the SEC and FINRA haven’t approved any custodians or exchanges for digital assets. The primary issuance part is clear but that is just the first step … the SEC seems to be having a tough time wrapping their head around blockchain projects. A few seem to be getting close to being qualified, however.

What about the concept of a “utility token?” Can this exist? Or is this just unicorns in Xanadu?

It absolutely CAN exist but until it DOES exist and it is presented to the SEC in a way they are going to be comfortable it is like a mythical creature. Also, we probably should call it something else due to the stigma of “utility token.

The SEC has moved slowly to enable blockchain based securities. Why is that? Can’t they do more?

SEC has full power in this area and does not need congressional action. All they need to do is provide guidance as to how the existing securities laws should apply to these assets specifically around custody and secondary trading as previously mentioned.

What about Congress? There is legislation pending that is ostensibly designed to facilitate digital assets. Do you believe this will be signed into law?

Several people on the hill are working on this.

Commissioner Peirce recently mentioned Representative Davidson’s Bill which is well drafted and comprehensive … Nothing will get through the Senate. Also for some reason, Democrats have been slow to get behind this despite all of the potential benefits for the underserved and society in general that blockchain technology can bring.

Is there a risk that issuers innovate outside the US (and vote with their feet) due to recalcitrant regulators/policymakers?

Yes, that is definitely happening.

Many projects are choosing to organize offshore and only offer their tokens to non-US citizens. The flip side is that many US citizens are participating in unregulated offshore offerings or on offshore exchanges and are going to get burned.

The SEC is not going to be able to do anything about that, whereas if they would just approve the intermediaries stuck in the registration process, a regulated industry could sprout up right here under their watchful eye. 

Legislative hope springs eternal.

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