SEC's Crypto Czar Signals Some Flexibility on Token Offerings

No-action letters may be a way forward for crypto startups hoping to avoid securities classifications.

AccessTimeIconDec 14, 2018 at 4:30 a.m. UTC
Updated Sep 13, 2021 at 8:40 a.m. UTC
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Some blockchain token projects may be allowed to bypass U.S. securities registration requirements by obtaining so-called no-action letters from the Securities and Exchange Commission (SEC), an agency official said.

Speaking at a gathering in New York Thursday evening hosted by the Wall Street Blockchain Alliance (WSBA) and held at the offices of Signum Global Advisors, Valerie A. Szczepanik made it clear that such letters would be rare. Nevertheless, they are not unheard-of.

"I think that’s a way forward for a lot of people who want to implement some of these things that may not exactly fit in the format of the rules that we want," said Szczepanik, who was appointed the SEC's first-ever senior advisor for digital assets and innovation in June.

Generally, token issuers have three options if they want to conduct an initial coin offering (ICO), she said: they can register as a securities offering, apply for an exemption or "make sure they're not a security."

But in limited cases, the SEC could decide that "maybe this doesn’t fit the letter of our law or regulation but it fits the spirit and we can accomplish all the goals of investor protection," Szczepanik said.

In those rare instances, the SEC may issue a no-action letter, which states that the agency's staff will not recommend that the commission an enforcement action against the issuer. As Szczepanik explained:

"The letters set forth exactly what the person plans to do or the entity plans to do and if it’s something that the SEC feels comfortable with we can release a no-action letter for exemptive relief saying 'we can recommend no enforcement action.'"

That being said, the letters are not binding, and are typically dependent on the securities issuers operating precisely by the terms laid out in the approved proposal.

Some projects may already have begun undergoing this process through the SEC's FinHub program, Szczepanik said.

"In this space, I think there is room for people to come in and we have had folks coming in either on a confidential basis or with proposals," she said.

Her remarks signaling a modicum of flexibility are notable in light of SEC Chairman Jay Clayton's advice last month to anyone raising money by selling a token that they should "start with the assumption that it is a security.”

Is it really a security?

Speaking more broadly as to how a token may be classified as a security, Szczepanik explained that any determination would be based on how the sale is structured.

"It's a rare set of circumstances" where a token will not be classified as a security during a sale. Generally, investors in a project will be looking for a profit, which is sufficient for the classification.

It is possible that after a project is built out, token purchasers may use the token without looking for a profit, which may shift its classification, she said, referencing SEC Director of Corporation Finance William Hinman's speech from earlier this year.

At the time, Hinman said that in his view, a blockchain platform like ethereum is sufficiently decentralized to the point that it does not qualify as a security at present.

And on the flip side, "If it’s a fully developed ecosystem or a blockchain and a token will be issued that will be used …. And that’s what people buy it for, there’s no promise of profit, I think that’s a potential and that’s up to people to propose it so that it makes sense," Szczepanik said.

At various points, she noted that while the SEC is not looking to stifle innovation or prevent capital formation, its primary focus is investor protection. As such, she demurred when asked if the SEC was concerned about the U.S. falling behind other nations in terms of regulation.

Not only that, but in her view, most ICOs are likely looking to tap U.S. investors due to the size of the available markets. Szczepanik said:

"Folks want to come to the U.S. and touch our investor and set up shop here and I think having strong markets encourages that in the long run, maybe not in the short run."

Editor's note: This article has been updated.

SEC building image via Kristi Blokhin / Shutterstock


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