Tag: SEC

Federal Securities Laws applied to ICO’s – Initial Coin Offerings

BITCOINNew “coins” or tokens and their platforms are all the rage.  Bitcoin, Bitcoin Cash, Ethereum, Litecoin, Zcash, Dash, Ripple, Monero, the list goes on and on and new ones keep popping up.  The new coins are either entirely their own platform or they are derivations, i.e. spin-offs of one of the existing virtual currency platforms.

The IRS took the position in 2014 that Bitcoin and coins like it were property, and not currency.  Interestingly, it did this as it referred to Bitcoin and other coins as “virtual currency.”  The classification of Bitcoin as property has certain effects on its treatment with respect to tax issues. The IRS has a decent FAQ on this here.

It was only a matter of time until the SEC weighed in.  Especially because the promoters of these new coins started calling the birth of new coin platforms as ICO’s (“Initial Coin Offerings”), and heavily advertising them to the public, such as Floyd Mayweather’s promotion of the Stox ICO on social media platforms, from which ICO he said he was going to make a “sh*t ton of money”.  That’s the type of situation and language that gets the SEC up in the morning.

Now under the federal securities laws (which I have described with respect to virtual world items in the past), an offering of “securities” must be done only after registration of such securities or pursuant to an exemption from registration.   The main issue present with these ICOs is whether the virtual currency is a “security” or not.   This would bring up the “Howey Test”, from SEC v. Howey Co., 328 U.S. 293 (1946), which can be summarized as whether the individual investing the funds into a common enterprise expects profits to come solely from the efforts of others (there are some other factors used in the test as well, but that’s it in a nutshell).  Usually the people pumping money into these ICOs are not the ones working on the platform (usually blockchain type information exchange platforms), and without that involvement it may come down to the investor’s expectation – are they expecting the money they invest to go towards the growth of the platform which would increase the popularity and hence value of the platform’s coin?  If so that may be an issue. What a coin (or sometimes called a “token”) is still has not been fully defined, and the characteristics of each coin or token vary by platform and change over time.

The SEC issued an Investor Bulletin that said that some ICOs depending on the circumstances “may” involve sale of securities.  It should be taken as a warning. While the application of the securities laws to coins and ICOs is a gray area, there is a line somewhere and the first very public ICO to cross it without registration or use of an exemption (which is doubtful if public advertising is used and investment is taken from anyone, regardless of circumstances), the SEC may come after.  Watch out Floyd, you may not be too worried about Conor McGregor but you should be of the SEC.

SEC’s Final Rules on Regulation Crowdfunding (Finally) @ Paper This Deal

So on October 30, 2015, the SEC adopted final rules which will, after the comment period is done (60) days and they are adopted, allow crowdfunding a/k/a Regulation Crowdfunding a/k/a Equity Crowdfunding in the United States.

At first glance the final rules appear similar to the previously issued versions, with individuals only authorized to invest a portion of their annual salary or net worth through crowdfunding each year.  See the press release here.

Portals which will offer the securities of companies offering same through Regulation Crowdfunding will be effective January 29, 2016 so hopefully a decent number of platforms will be available to start the party in early 2016.

The final rules will be effective 180 days after they are published in the Federal Register. The below is a brief summary in FAQ form covering the Regulation Crowdfunding rules.

Read More

SEC Adopts Final Rules Amending Regulation A @ Paper This Deal

On March 25, 2015, the SEC adopted final rules amending Regulation A, referred to now as Regulation A+. These amendments were required by Congress via Title IV of the JOBS Act which was passed some time ago. (we are all still waiting for the Regulation Crowdfunding rules to be finalized).

The general rule is that when a company offers or sells a security, the security must either be registered or an exemption from registration must be relied upon.  Regulation A has been on the books for a long long time and has been relied on very little.

Now the SEC has a tough job, its tasked with allowing companies to raise money via offerings of securities but on the other hand it needs to ensure that fraud does not run rampant. These two goals don’t have to be mutually exclusive, but the SEC has generally focused on the latter of the two at the expense of the first. 

Read More

The SEC’s New Financial Sniffing Tools @ Paper this Deal

Beginning this year, as described by SEC’s Chair Mary Jo White at the Chair Mary Jo White at the 41st Annual Securities Regulation Institute on January 27, 2014, described some of the new tools and systems the SEC would be using in 2014.

Read More

Thoughts on the Twitter IPO @ Paper this Deal

Last Thursday September 12, 2013, Twitter, from its official account, tweeted the following:

TwitterTwitter         @twitter

We’ve confidentially submitted an S-1 to the SEC for a planned IPO. This Tweet does not constitute an offer of any securities for sale.

14,577 RETWEETS 3,357 FAVORITES

Read More

Intrastate Securities Offering Exemption @ Paper this Deal

I wanted to blog on some of the lesser known and relied on securities exemptions.  In certain situations they can be very helpful.  One of these is the federal Intrastate Securities Offering Exemption.  Simply, if you offer and sell in one state and one state only, and some other factors are met, the issuer is exempt from the federal registration requirement.  Blue sky laws will still apply but some states have limited offering exemptions or other exemptions the issuer can rely on.

Read More

SEC allows general solicitation and advertising in Rule 506 offerings @ Paper this Deal

Yesterday, July 10th, under the provisions of the JOBS Act the SEC passed its Final Rules which amended Rule 506 and Rule 144A to lift the ban on general solicitation and advertising in offering and selling securities in a Rule 506 sale as long as all purchasers of the securities are accredited investors.

Read More

To Register or Not to Register?: Broker-Dealers and Finders @ Paper this Deal

If you are involved in a startup you undoubtedly have heard about the company’s need to raise money. If you’ve gone the regular route you may be funded by institutional investors, like an angel or VC fund. The company may also have raised money through a private placement by selling equity to investors directly or through brokers.

You may have heard of another type of person involved in the capital raising process called a “finder”.   Everyone has heard of the term a “finder’s fee” which is known to be about 10% of the overall transaction.   The concept is the same with startup financing or M&A activities, although who can qualify as a finder and how they can be compensated has been a big deal with the SEC in the last couple years.  The real issue is when anyone can act as a finder, and if they really should be registered with the SEC as a broker-dealer.

Read More

Powered by WordPress & Theme by Anders Norén