Jared Marx is an attorney at Washington, DC law firm Harris, Wiltshire & Grannis. He advises companies about bitcoin-related regulatory law and represents companies and individuals in civil and criminal proceedings.
Here, he discusses why a new securities ruling is a potential boon for 'crypto 2.0' and 'bitcoin 2.0' companies operating in the US.
On Wednesday, the US Securities and Exchange Commission (SEC) adopted regulations permitting crowdfunding for business startups.
The new rules give businesses in the blockchain ecosystem an avenue to get financial backing from the best-educated investors out there: their users.
I wrote last week about the challenges that 'bitcoin 2.0' companies face from the squishy definition of a "security" under US law. These new rules don’t resolve that ambiguity, but they do create a low-cost safe harbor for businesses that want to avoid uncertainty (and possible criminal exposure) by simply treating their token sales as sales of securities.
Here’s how it works: prior to these rules, a company could generally sell securities only to wealthy individuals or after going through expensive registration with the SEC.
Now, companies can file a mini-registration statement with the SEC and then sell securities to ordinary people, including over the Internet.
As an added bonus, state-level compliance under these rules is minimal, as the SEC has largely preempted state securities laws in this area. There is, of course, a whole bunch of fine print.
Businesses that choose this route, for example, will need audited financial statements, and will have to do some ongoing reporting to the SEC. There are also limits on how much capital you can raise this way, though those limits — $20m or $50m, depending on which “tier” of the rule you use — are unlikely pose problems for most companies in the space.
Similarly, companies can accept only a certain amount of money from each investor. But again, the limit is relatively high — 10% of each investor’s wealth or yearly income — and even better, companies can generally rely on investors to self-certify that they’ve met this requirement.
Other details are more mundane, but also put this firmly in the don’t-try-this-at-home category: There are rules about sales by affiliates, rules about pre-sale “solicitations of interest,” and lots of rules about what goes in the mini-registration statement. Prior “bad acts” can also disqualify a company from using the provisions, and only US and Canada based (and incorporated) issuers qualify.
These new rules are good — and potentially revolutionary — for bitcoin 2.0 companies.
But they’re also good for all companies in the bitcoin ecosystem, who can take advantage of them to raise capital from their tech-savvy pool of users. Selling securities this way still isn’t a walk in the park — it will place some additional burdens on companies and require careful legal advice. But it is decidedly good news that companies can now count this path as among their options.
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