Rule 195: SEC Commissioner Peirce Proposes Safe Harbor for Token Offerings Not Immediately Deemed to be Securities [u]

Today, in a speech delivered at an event in Chicago, SEC Commissioner Peirce presented a new proposal in the treatment of digital assets that may not be treated as securities perhaps representing a dramatic shift in the US token offering marketplace.

In the US, pretty much all digital assets are deemed to be securities. While there have been several, notable exceptions, the risk is high that any token offering will be viewed as a security by financial regulators. The concept of a “utility token” has evaporated in the US as issuers are compelled to file for an exemption to sell digital assets or the option on a future purchase of these tokens.

This treatment by the SEC has compelled many digital asset entrepreneurs to move to other global jurisdictions that have provided more flexible rules. Some industry insiders believe the SEC’s approach has undermined innovation and harmed a sector of Fintech where the country could potentially dominate the rest of the world.

Commissioner Peirce has long expressed her concern that innovation was being pushed aside while securities laws were being applied in a possible mismatch of technology and outdated rules. Peirce has now proposed a safe harbor where digital assets will not be treated as securities, at least at first.

In the proposal, digital assets may be treated as non-securities for a period of time. Following this period, the inimitable Howey Test will be applied and a determination will be made as to whether, or not, the digital asset is sufficiently decentralized and thus not a security.

The pending safe harbor has been labeled Rule 195.

As we understand it, key to Rule 195 will be the ability to allow for trading on compliant digital asset exchanges – a feature that will be well received by the digital asset sector if incorporated.

In a blog post, CoinList General Counsel Georgia Quinn lauded the announcement and the proposal by Commissioner Peirce. Quinn stated:

“Today we both congratulate and thank SEC Commissioner Hester Peirce. In her announcement of proposed Rule 195, she set a course for compliant blockchain projects to innovate and grow here in the United States. We believe in the promise of blockchain technology and are dedicated to helping developers, investors and users change our world for the better. Now, thanks to the legal clarity provided by this proposed rule, developers can rest assured that, as long as they stay within the legal guidelines set forth, the protocols they develop and the networks they create will not run afoul of the US securities laws.”

As a leading digital asset issuance platform, CoinList should benefit from these material changes to existing law as well as the rest of the global token offering ecosystem that may be able to leverage any updated rules.

Quinn said that what excited her the most about Rule 195 was the combination of enabling digital asset innovation while providing strong and “appropriate” consumer protection:

“We have witnessed first-hand the segregation of people based on their wealth or income and the resulting denial of access to certain opportunities. This proposed rule will provide everyone with the adequate information they need to decide if this technology is something they want to participate in and will allow equal access regardless of economic status,” Quinn stated. “Similarly, the time limit of the rule ensures that projects cannot simply sit in limbo and not ship products. This protects users from indefinitely holding products they cannot use or transfer.”

CoinList co-founder and President Andy Bromberg, issued the following statement:

“This is a great day for the blockchain industry and the United States. Today we both congratulate and thank SEC Commissioner Hester Peirce. In her announcement of a proposed safe harbor rule, she set a course for compliant blockchain projects to innovate and grow here in the United States, resolving more than two years of ongoing discussions about the applicability of securities laws to crypto.  Under the previous ambiguous regime, some of the top crypto projects moved overseas or prohibited Americans from purchasing tokens. Now, economic benefits from this industry can once again accrue to the United States, and US purchasers can benefit from this world-changing technology.”

Expect the proposal to go through a flagpole process where the broader public, as well as public officials, will be given a chance to comment on the digital asset safe harbor.


Update: Here is an outline of the proposed rules

Any applicable digital asset will have three years after the token sale to prove if it is sufficiently decentralized and/or provide sufficient utility for the token not to be deemed a security.

In effect, Rule 195 proposes the following:

  • The creating company must undertake a good faith effort to build a decentralized and/or functional network as defined in the rule as Network Maturity
  • Provide certain disclosures on a publicly available website.
  • Offer and sell tokens to provide access to, participation on, or the development of the network.
  • Undertake in good faith to create liquidity for users by listing tokens on a compliant exchange.
  • File a notice of reliance with the SEC within 15 days of the first sale or distribution of tokens that triggers reliance on the rule.
  • The creating company must also provide certain disclosures regarding their identities and experience, the source code itself (if available), details about the project and its functionality or anticipated functionality and development timeline, specifics about the token economics, the intended use of proceeds, certain holdings of tokens or promises of tokens, sales by the company of 5% or more of their token holdings, prior token sales and where the token can be traded.
  • Tokens or SAFTs sold prior to the rule that relied on a valid exemption from the securities laws are eligible to use Rule 195 as long as they abide by its applicable provisions and will have the lesser of 3 years from the prior sale and 18 months from the enactment of Rule 195 to reach Network Maturity.
  • The rule requires liquidity of the tokens which will allow purchasers the opportunity to sell them to a third party.

The tokens are also required to:

  • Be created in response to the verification or collection of proposed transactions or pursuant to rules for the token’s creation and supply that cannot be altered by any single person or persons under common control.
  • Have a transaction history that is recorded and publicly available in a blockchain or similar data structure in which consensus is achieved through a verifiable process, and after consensus is reached, resist modification or tampering by any single person or group of persons under common control.
  • Be capable of being transferred between persons without an intermediary party.
  • Not represent a financial interest in a company, partnership, or fund, including an ownership or debt interest, revenue share, entitlement to any interest or dividend payment.

Of course, any digital asset offering must comply with anti-fraud laws as well as KYC/AML rules.

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