These orders are significant for reasons that may not be immediately obvious. While clarity is welcome, I think the SEC is setting a precedent that is likely to punish responsible companies looking to comply. A thread 👇
I’m sure there will be great takes from the usuals (e.g. @jchervinsky , @msantoriESQ , @propelforward , @stephendpalley), so follow them for more in depth discussions, but I want to focus on one particular section of these orders: the 12(g) registration requirement.
See, when a Company has more than 500 non-accredited investors or more than 2000 holders of their equity securities generally, Section 12(g) of the Exchange Act typically requires that the Company become a public reporting company, with limited exceptions.
This is significant, because it requires companies to make public reports and comply with other rules like most other public companies (e.g. Apple). If you’ve ever seen a 10-Q, it’s obvious that complying with these disclosure obligations is no small feat and it’s very expensive.
An important thing to understand is that this rule generally applies to equity securities, even those sold in private placements or pursuant to exemptions like Reg A+.
This means that even if companies legitimately sell tokens in private sales or in a properly qualified public sale (crowdfunding, A+), if they’re considered equity securities, the company may have to register publicly under 12(g). No crypto company is prepared for this.
Prior to today, some lawyers made arguments that the SEC might consider an argument that, if tokens are securities, they aren’t equity securities, but some other type of security (e.g. debt) that wouldn’t trigger public registration requirements and the accompanying burden.
In any case, there’s other stuff in the orders about how the tokens themselves as securities, but much of this has been previously discussed (e.g. promising exchange listings, using funds to build “ecosystems” to pump tokens value, etc.).
But, the 12(g) issue may have a much greater chilling effect in the US than previous actions. For issuers that have considred compliant public sales through a Reg A+ offerings or waiting for the 1 year holding period on privately sold tokens, this may give them pause.
There are few, if any, token projects that can thrive and scale if limited to 2000 holders before becoming a public company, and I don’t think I’ve seen any that’s ready to meet the burden of becoming a public company. It can potentially be years before a company can unregister.
While I’m not surprised that they’re calling tokens equity securities and requiring registration, I think this is bad precedent if the SEC wants to encourage issuers to stay within the US and work with them.
Even issuers who legitimately issue tokens under Reg A+ or. Reg D and run legit businesses are unlikely to be able to comply at an early stage of a project‘s life, but that’s arguably exactly when they need to be able to expand to many users and scale quickly.
An artificial limit on their user base to avoid public registration will likely kill many projects, and I don’t think many investors will be thrilled to see companies setting aside millions to pay for all the advisors a pubco needs, IN ADDITION to already ridiculous legal fees.
So, yes. Not feeling great about calling this right, but just reinforces the need for companies who want to stay here to really be confident that they aren’t issuing securities, or to be prepared to register as a pubco at some point sooner than most. Not ideal.
Oh, and not your lawyer and there’s no legal advice here unless you’re willing to send me 500000 $PRG and make me part of your “ecosystem of the future, man.”
