Whether digital assets are securities under Federal securities law or something other than a security, and therefore outside those provisions, is a pressing question. On June 14, 2018, William Hinman, the Director of the Division of Corporation Finance at the Securities and Exchange Commission, provided valuable insights about current staff thinking and offered future guidance for market participants. However, parsing the analysis in respect of a particular digital asset remains a daunting task.
This article addresses the problem of how to separate capital-raising securities from utility tokens. The proposed solution is to use the basic SAFT model, but add a mechanism that extinguishes the capital-raising securities and results in the distribution only of utility tokens.
A comprehensive summary of the regulatory framework applicable to cryptocurrency as it relates to securities issuance and trading, commodity derivatives law issues, federal and state banking laws, litigation, and cybersecurity.
Issuers and others involved in offerings of crypto asset securities, such as "ICO"s, must be alert to the potential application of SEC Regulation M.
The SEC's Divisions of Enforcement and Trading and Markets put forth a “Statement on Potentially Unlawful Online Platforms for Trading Digital Assets” regarding the legal ramifications of such platforms operating as “exchanges,” as defined by the federal securities laws. Such a designation requires that the platform must register with the SEC as a national securities exchange or be exempt from registration -- practically meaning registration as an alternative trading system (“ATS”). Each road to registration is fraught with its own pitfalls that need to be carefully examined but for those entities already in operation and potentially within the crosshairs of the SEC, the only viable business option is to try to register as an ATS.
SEC Regulation A may present an attractive financing option for issuers of "token" securities. However, issuers should expect that the SEC will be closely monitoring activity in this space and will take swift action if it has concerns about potential investor harm.