A recent MarketWatch article notes there’s been a steep drop-off in the number of Reg D token offerings this year. If the Enforcement Division taking issue with a SAFT isn’t enough to put companies off that approach, keep in mind that the remedies in these actions go beyond just halting the current offering:
Until September 30, 2019, SEC enforcement actions in the crypto industry conveyed a consistent message: most crypto is a security, and if a token issuer does not follow the registration requirements of the 1933 Act, the issuer would face significant consequences in the form of substantial penalties, a mandated rescission offer to US investors, a requirement to register the tokens under Section 12(g) of the 1934 Act, and bad actor disqualifications preventing the issuer from future Regulation A and Regulation D offerings.
That’s the intro from a Wilson Sonsini memo – but it does note a recent “aberration” on the remedies front:
On September 30, the SEC announced a settlement with Block.one that did none of these things. Despite finding that Block.one issued tokens that were securities in the United States without complying with registration requirements of the 1933 Act, the SEC: imposed a financial penalty on Block.one that was minor in the context of the total size of Block.one’s capital raise; did not require Block.one to make a rescission offer to investors; did not require Block.one to register its tokens under the 1934 Act; and did not impose bad actor disqualifications under Regulation A and Regulation D.
And, as discussed below, the Block.one Settlement Order omitted any mention of key factual information necessary to support the SEC’s conclusion that the tokens were in fact securities. Equally surprising, the SEC did not address, in any respect, whether new tokens issued being used on a blockchain supported by Block.one are securities, and the SEC took no action (and offered no discussion) with respect to the issuance of those tokens.
What are we all to make from these mixed messages? A Eversheds Sutherland memo says that the most we can take away is that the SEC is evaluating facts in settlement proceedings on a case-by-case basis. If you’re doing an unregistered token offering right now, go document some good facts!
-Liz Dunshee, TheCorporateCounsel.net October 28, 2019