The Securities and Exchange Commission recently issued guidelines for cryptocurrency companies that want to sell digital tokens. In part, this is a positive note as regulatory clarity seems to be increasing. However, some feedback claims that the SEC has gone too far.
For example, some industry professionals claim the SEC guidelines fail to acknowledge how crypto tokens are distinct from other assets.
The guidelines arrived as the SEC continues to investigate companies that sold tokens to the public during the recent crypto boom. During this period, there were clearly a number of fraudulent offerings. The guidelines explain how a Supreme Court decision that is decades, and which sets out a test for defining an investment contract, should apply to token offerings.
In short, the vast majority of tokens put up for sale are or will likely be considered securities, which means they must be registered with the SEC before they can be offered to the public.
The SEC further issued a letter that positively reflected one company’s plans to offer unregistered tokens for membership in a club for hiring private jets. The SEC did so in part because the company indicated that none of the token proceeds would be used to fund the building of the token network, and also that the tokens would not trade outside TurnKey’s platform.
According to critics, restrictions like the ones attached to TurnKey Jet negate the very reasons token projects are appealing in the first place. In the view of proponents, public token sales—which are tracked on shared ledgers known as blockchains—provide an inexpensive source of fund-raising, while the ability to exchange tokens on an external platform creates an important secondary market for tokens.
The new SEC guidelines also reaffirmed the SEC’s conclusion that two well-known early examples of blockchain and token offerings, Bitcoin and Ethereum, are not securities on the grounds that they are decentralized. This finding, however, may frustrate the leaders of newer blockchain projects who believe they face a wall of regulatory obstacles the earlier projects did not. This leads some to believe the SEC’s position will cause smaller companies to set up shop outside the U.S.
One alternative may be a the “Reg A plus” offering. As noted in our other blogs, Reg A+ lets companies seeking to raise less than $50 million in public markets pursue a slimmed down IPO and registration process. Some companies pursuing token offerings may be testing the waters and, if this trend continues, it is expected other companies will likely do so as well. Token sellers using the Reg A+ route will likely eventually gain traction. However, these applications face a long-wait at the SEC.
Congress may intervene and help crypto companies face less burdensome demands from the SEC. For example, a recent bipartisan bill, the Token Taxonomy Act, proposes to carve out certain crypto offerings from the current definition of securities. However, the bill appears to be stalled for the time being.