DLXLaw, a boutique law firm that specializes in blockchain and smart contracts, recently helped a digital asset issuer receive a no-action letter (NAL) from the Securities and Exchange Commission (SEC). By receiving the NAL, the issuer, Pocketful of Quarters, received an implicit green light to pursue its token offering for an asset that is not deemed to be a security – vital for the company to pursue its business model.
While many players in the digital asset sector bemoan the lack of clarity in the law, DLXLaw pursued the one avenue open to them – a discussion with the Commission to create an offering that qualified under current guidance.
By receiving this NAL, Pocketful of Quarters helped to push the legal ball further down the field in clarifying rules for token issuance.
Lewis Cohen, a securities attorney who left big law to launch an entrepreneurial law firm, lead the charge at DLXLaw in receiving the no-action letter.
As most insiders understand, having a solid communication path into the SEC is absolutely vital in pursuing novel and unique approaches to offerings under existing securities law in a digital universe.
Crowdfund Insider recently spoke with Cohen to learn more about the Pocketful of Quarters no-action letter and his thoughts on the emerging digital asset issuance ecosystem. Our discussion is shared below.
Congratulations on the NAL from the SEC regarding pocketful of quarters. How long did it take to get this worked out?
Lewis Cohen: Thanks! The whole process wound up taking about a year. My colleague Greg Strong and I started the process with George and Mike Weiksner of Pocketful of Quarters in the summer of 2018. Of course, we were not going full-time the whole year – among other things we had to deal with the US federal government partial shutdown last winter as well as hiatuses while the SEC was formulating a number of major policy announcements.
It is clear you worked closely with the SEC / FinHub. Can you share some insight into the experience? It is all about “Facts and Circumstances, correct?”
Lewis Cohen: Correct – as we have been admonished by SEC Chairman Jay Clayton and other senior members of the SEC staff, “facts and circumstances” matter a lot when it comes to token sales.
This makes sense when you consider that we are applying the principles-based test set out by the Supreme Court in the Howey case and developed by federal courts over the next 70 plus years. Working closely with the great team at FinHub allowed us to work through the Pocketful of Quarters platform and address the potential concerns raised along the way.
You took the leap and left big law for boutique blockchain. An entrepreneurial attorney. Blockchain is hot right now. What type of activity is your firm seeing? What are issuers/entrepreneurs pursuing right now?
Lewis Cohen: Yes – though when you are certain of a particular path, the leap doesn’t seem quite as large.
My co-founder, Angela Angelovska-Wilson and I identified what at the time appears to be a glaring gap in the market – a law firm with highly experienced securities and financial regulatory lawyers who also had a very strong understanding of the technology underlying blockchain-based projects. It also helped that we were very much philosophically aligned with our clients in the desire to develop new business models utilizing the incredible set of tools we call “Blockchain”.
Pocketful of Quarters was interesting as a white-listed group could exchange the non-security tokens for ETH. Can you explain how you worked this out?
Lewis Cohen: Mike Weiksner and his son George deserve all of the credit for this. They envisioned a new business model where unaffiliated game developers could use a common in-game unit of value if they had a transparent way to be sure that they could “cash-out” of the coins they received back into dollars or the other fiat or cryptocurrency of their choice.
Of course, to allow this, it is essential to know that there won’t be any “bad actors” in the bunch – hence the whitelisting of game developers.
What about the security token side?
Lewis Cohen: I love this aspect of Pocketful of Quarters! No business model can succeed without a way of rewarding those who provide the capital necessary to develop and market the enterprise. In the case of PoQ, the investment capital came from both traditional equity as well as a “security token” that entitles holders to 15% of the revenues from the sales of the “Quarters” gaming token.
We recently discussed the current regulatory environment in the US. You would prefer to see a non-security, utility type offering similar to some other jurisdictions – correct?
Lewis Cohen: Yes, that’s right.
When it comes to establishing a truly decentralized blockchain-based marketplace, it is a necessary requirement that there be a means by which providers of resources and consumers of resources can interact without a central intermediary. Getting such a network up and running is a very difficult task. You could argue that only the Ethereum network has meaningfully achieved this goal so far. Labeling the computer code needed to allow the system to be functional as a “security” makes it almost impossible to achieve this, in my view. However, that does not mean that fundraising with the promise of economic gain through network growth is not quintessential securities activity in the United States.
Conventional wisdom is that the SEC will adhere to existing securities law so it will take an act of Congress to legislate a utility type offering that may be tradable. What are your thoughts on this?
Lewis Cohen: I certainly understand this perspective – perhaps it is even the better view.
That said, I am also very optimistic about our ability to make steady progress simply by working directly with the Staff of the SEC. The team at FinHub are amazing and really get the space. The blockchain and crypto community also need to take ownership of the fact that a lot of damage was done during the “ICO boom” of 2017-18. It will take time to rebuild trust with regulators – and not just the SEC, this includes the CFTC, FinCen and of course state-level regulators as well. We’ll get there, though. The economic benefits of blockchain-based networks will ensure that.
You said the current Token Taxonomy Act Bill focuses too much on terminology instead of the process. Can you elaborate?
Lewis Cohen: Sure. The current Token Taxonomy Act Bill is obviously well-intended from the perspective of those working with blockchain technology. In addition, I have tremendous respect for Congressman Davidson and the great group that pulled this proposal together. That said, I also have a number of concerns about the approach embodied by the TTA – particularly the fact that it attempts to create a blockchain technology-specific exemption to the federal security laws. If legislation is to be adopted, I would prefer a more technology-neutral approach to clarifying the law. If there are deficiencies in the current law, let’s address them in a way that does not require new federal legislation every time a particular technology changes or develops.
What are your expectations for the digital asset marketplace in the US for the rest of the year? What about globally?
Lewis Cohen: I see a return to slow and steady growth. The boom-and-bust cycle of the last five years or so does not promote sustainable growth for the digital asset marketplace. Most importantly, we need to develop use cases for blockchain and tokenization that “regular folks” can use and relate to. This is the most import issue at the moment as far as I am concerned. And – you won’t be surprised to hear this – I think the Pocketful of Quarters platform does just that!
Thanks for your time – it’s been great speaking.
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