By Vanessa Malone
It is said that the blockchain industry is in its infancy. While this may be true regarding adoption and integration, it’s definitely in its rebellious teenage years regarding compliance.
A few months ago, Kik made headlines for launching a crowdfunding campaign to support its case against the SEC, claiming its going to “take on the SEC in court to make sure there is a foundation for innovation going forward.”
Separately, on October 11, 2019, the SEC filed an emergency action and a temporary restraining order against Telegram alleging that the company violated federal law by selling unregistered securities.
Telegram claims that gram tokens are not securities, and the SEC’s emergency action “runs counter to longstanding Supreme Court precedent, the SEC’s own views relating to other cryptocurrencies, and common sense.”
The SEC’s response:
“We have repeatedly stated that issuers cannot avoid the federal securities laws just by labeling their product a cryptocurrency or a digital token,” Steven Peikin, Co-Director of the SEC’s Division of Enforcement. “Telegram seeks to obtain the benefits of a public offering without complying with the long-established disclosure responsibilities designed to protect the investing public.”
Regardless of who is right and who is wrong, this formal boxing match is positioning the blockchain community and the regulators on opposing sides when in order for us to move forward productively, we need to work together. There are many outstanding issues surrounding blockchain-based securities that need to be dealt with.
For example, some issuers have decided to acquiesce and follow existing securities law by conducting digital securities offering utilizing Rule 506(c) of Regulation D (Reg D) or Regulation A+ (Reg A+). This has proven to be a great capital raising vehicle for companies to maintain compliance while taking advantage of the transparency, speed, increased potential liquidity, and other blockchain benefits.
In August of this year, a major milestone for both the blockchain and financial communities was accomplished. Blockstack and YouNow became the first Reg A+ token offerings to be qualified by the SEC. These qualifications allowed them to broadly market their offerings and accept investments from the general public. It’s a big deal because until then, the majority of digital securities offerings were conducted utilizing Reg D. In a Reg D offering only high-net worth individuals, or accredited investors, are able to participate. Reg A+ on the other hand, gives fans, customers, and other interested parties access to early stage investment opportunities alongside accredited investors. This aligns much closer with the blockchain community’s founding principles.
The problem is that we now have two qualified Reg A+ digital securities offerings, PROPS and Blockstack, that were forced to fit the equivalent of frequent flyer points into a securities framework. This opens up new cans of worms regarding secondary trading. How will they trade alongside traditional securities? Moreover, how will they trade alongside standard digital securities which don’t operate like utility tokens?
The cherry on top is that there is currently no liquid marketplace approved by regulators available for secondary trading of digital securities. Trading is just one large area of concern. There are countless others surrounding how the technology can integrate compliance, what AML/KYC and other protections are in place, and what guidance companies need from regulators to stay in line.
We can all agree their needs to be more clarity on the regulatory landscape. But, in order for regulators to make this more clear they need to better understand the technology, how it works, and the common issues associated with it. This doesn’t happen overnight, it has to be an ongoing and open discussion.
Horizon is hoping to foster these important dialogues with the regulators through a series of forums. The first one we’re hosting with RSM US LLP is called Dialogue with the Regulators: Navigating Blockchain & Fintech. We’re bringing together senior regulators — including some active on the enforcement cases mentioned above — and blockchain industry leaders to start taking steps forward together, instead of against one another. To learn more or request an invite, visit http://bit.ly/DWR2019-.