In a speech delivered yesterday, Hester Peirce, one of the five commissioners of the Securities and Exchange Commission (SEC), outlined radical new proposals to make the US a friendlier market for digital economy start-ups seeking to issue tokens to develop their networks.
“I can’t think of a more bullish proposal for the industry” Ryan Selkis, CEO of Messari, a cryptocurrency data and research firm, said in a tweet.
The proposal, if implemented, would mark a radical departure from earlier SEC policy on token offerings. Previously, the regulator had made it clear it intended to bring most such sales within the scope of securities law.
For example, in December 2017, near the peak of the cryptocurrency bubble, SEC chairman Jay Clayton warned about get-rich schemes dressed up as initial coin offerings (ICOs).
The following summer, William Hinman, the SEC’s director of the division of corporation finance, formalised the regulator’s stance by saying that most coin and token offerings would fall within the scope of US securities law, as defined in a famous 1940 legal case, the Howey Act.
“Coins are often touted as assets that have a use in their own right, coupled with a promise that the assets will be cultivated in a way that will cause them to grow in value, to be sold later at a profit. And…tokens and coins typically are sold to a wide audience rather than to persons who are likely to use them on the network,” Hinman said in a speech justifying the SEC’s decision to treat most ICOs as sales of securities.
Hinman specifically exempted bitcoin and ethereum from securities law, but the SEC has since pursued a number of enforcement actions against the promoters of ICOs.
“We need to ask ourselves whether the law should change”
In her speech, delivered to the International Blockchain Congress in Chicago, Commissioner Peirce hinted that the SEC’s strict stance was hindering entrepreneurs with what she saw as valid plans.
“When we see people struggling to find a way both to comply with the law and accomplish their laudable objectives, we need to ask ourselves whether the law should change to enable them to pursue their efforts in confidence that they are doing so legally,” Peirce said.
“Many crypto entrepreneurs are seeking to build decentralized networks in which a token serves as a means of exchange on, or provides access to a function of the network,” she said.
“In the course of building out the network, they need to get the tokens into the hands of other people. But these efforts can be stymied by concerns that such efforts may fall within the ambit of federal securities laws.”
“Our securities laws stand in the way of innovation”
Peirce outlined a number of areas where she believed innovation was being stifled.
“Whether it is issuing tokens to be used in a network, launching an exchange-traded product based on bitcoin, providing custody for crypto assets, operating a broker-dealer that handles crypto transactions, or setting up an alternative trading system where people can trade crypto assets, our securities laws stand in the way of innovation,” she said.
Peirce said she was publishing a proposal to grant crypto start-ups a three-year ‘safe harbour’ provision exempting them temporarily from securities laws.
This safe harbour, said Peirce, would come with a number of conditions for start-ups wanting to issue tokens to help develop their digital networks.
“This approach is detrimental to the US economy”
First, she said, the start-up team must intend for the network on which the token functions to reach network maturity—defined as either decentralization or token functionality—within three years of the date of the first token sale.
Second, the team would have to disclose key information on a freely accessible public website.
Third, the token must be offered and sold for the purpose of facilitating access to, participation on, or the development of the network.
Fourth, the team would have to undertake good faith and reasonable efforts to create liquidity for users.
Finally, the team would have to file a notice of reliance on the safe harbour on EDGAR, the SEC’s database, within fifteen days of the date of the first token sale.
Peirce cited national interest in her speech, saying the US securities regulator’s previously strict stance on token sales had been pushing a lot of digital economy activity into other markets around the globe.
“Other [token] projects have sought to sever any ties with the United States to avoid the reach of our securities laws. This approach is risky because invariably some activity occurs in the United States. Moreover, this approach is detrimental to the US economy because it prevents American citizens from participating in budding token networks,” she said.
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