0/ Today marks the conclusion of what I'll call "phase one" of the SEC's crypto enforcement strategy. My thoughts on:
- the enforcement actions against AirFox & Paragon
- the statement on digital asset securities issuance & trading
- what to expect in "phase two"
Thread. 👇
- the enforcement actions against AirFox & Paragon
- the statement on digital asset securities issuance & trading
- what to expect in "phase two"
Thread. 👇
1/ Before I dive in, a reminder I can't repeat often enough:
*The SEC does not make the law.* Congress makes the law & courts interpret it. SEC lawyers only decide their own enforcement strategy. Nothing they say is binding: they can change their minds & they can lose in court.
*The SEC does not make the law.* Congress makes the law & courts interpret it. SEC lawyers only decide their own enforcement strategy. Nothing they say is binding: they can change their minds & they can lose in court.
2/ Let's start with the enforcement actions.
According to the SEC, both AirFox and Paragon raised millions of dollars through ICOs conducted after the SEC issued its 2017 DAO Report. We pretty much saw this coming after last week's EtherDelta order:
According to the SEC, both AirFox and Paragon raised millions of dollars through ICOs conducted after the SEC issued its 2017 DAO Report. We pretty much saw this coming after last week's EtherDelta order:
3/ The SEC said both companies issued securities under the Howey test. Since the ICO tokens weren't registered, the companies violated Securities Act § 5. Honestly, this is no surprise to any of us crypto lawyers.
For more details, read the orders here: sec.gov/news/press-rel…
For more details, read the orders here: sec.gov/news/press-rel…
4/ So, what's the punishment for issuing an unregistered security?
$250k. End of story. Yes, really.
AirFox & Paragon raised $15 million and $12 million respectively. Both are free & clear with a $250k penalty + compliance (registration & disclosures).
$250k. End of story. Yes, really.
AirFox & Paragon raised $15 million and $12 million respectively. Both are free & clear with a $250k penalty + compliance (registration & disclosures).
5/ Note both companies got the same penalty despite being very different.
AirFox transfers mobile airtime & data; Paragon services the *illegal* cannabis industry. One seems more risky than the other.
Yet, both of them paid $250k. Maybe that will be the price for everyone?
AirFox transfers mobile airtime & data; Paragon services the *illegal* cannabis industry. One seems more risky than the other.
Yet, both of them paid $250k. Maybe that will be the price for everyone?
6/ Then came a new SEC statement.
This is the first since Bill Hinman's speech saying bitcoin & ether aren't securities because they're "sufficiently decentralized."
It covers all of the recent SEC enforcement actions against industry players: ICOs, exchanges, brokers, & funds.
This is the first since Bill Hinman's speech saying bitcoin & ether aren't securities because they're "sufficiently decentralized."
It covers all of the recent SEC enforcement actions against industry players: ICOs, exchanges, brokers, & funds.
7/ Which brings me to why I'm calling this the end of "phase one."
It looks like the SEC has been building up to this statement for almost a year. They strategically prosecuted a few members of each group in order to craft this statement as guidance for everyone else.
It looks like the SEC has been building up to this statement for almost a year. They strategically prosecuted a few members of each group in order to craft this statement as guidance for everyone else.
8/ This is a classic SEC strategy known as "guidance by enforcement."
It can be deeply frustrating for an industry in need of a clear set of rules rather than a patchwork of orders. But regulators like it: it leaves them free to exercise their discretion.
It can be deeply frustrating for an industry in need of a clear set of rules rather than a patchwork of orders. But regulators like it: it leaves them free to exercise their discretion.
9/ That freedom is crucial to understanding how enforcement works.
In reality, very few SEC cases are openly litigated. Most settle after lengthy & private negotiations where both sides lay out their strengths & weaknesses and argue about what might happen if they do litigate.
In reality, very few SEC cases are openly litigated. Most settle after lengthy & private negotiations where both sides lay out their strengths & weaknesses and argue about what might happen if they do litigate.
10/ The SEC rarely wants to test uncertain legal theories in court. If they were to lose on a big issue--like whether tokens are securities--it could disrupt their enforcement strategy for the entire industry.
The best way to avoid that result? Leave the rules vague & ambiguous.
The best way to avoid that result? Leave the rules vague & ambiguous.
11/ That may be why today's statement *still* doesn't clearly define how the federal securities laws apply to digital assets.
The statement asks: "when is a digital asset a security?" The only answer it gives: "look at the DAO Report," even though that was issued ~16 months ago.
The statement asks: "when is a digital asset a security?" The only answer it gives: "look at the DAO Report," even though that was issued ~16 months ago.
12/ The statement is even less helpful on complex questions like whether decentralized exchanges are subject to federal regulation.
It says this determination depends on "the relevant facts and circumstances." This is ultimate lawyer-speak for "not sure, don't @ us."
It says this determination depends on "the relevant facts and circumstances." This is ultimate lawyer-speak for "not sure, don't @ us."
13/ Nor does the statement say how far the SEC thinks its jurisdiction extends.
Many companies are responding to US regulatory uncertainty by trying to escape the SEC's reach. But will the SEC go after overseas ICOs & exchanges that exclude US citizens? "Not sure, don't @ us."
Many companies are responding to US regulatory uncertainty by trying to escape the SEC's reach. But will the SEC go after overseas ICOs & exchanges that exclude US citizens? "Not sure, don't @ us."
14/ Driving this point home, the statement ends:
"[C]onsult with legal counsel concerning the application of the federal securities laws and contact Commission staff, as necessary, for assistance."
In other words: "there will be no simple rules. If you want answers, come ask."
"[C]onsult with legal counsel concerning the application of the federal securities laws and contact Commission staff, as necessary, for assistance."
In other words: "there will be no simple rules. If you want answers, come ask."
15/ Yet, the statement does give us one very helpful & important assurance:
"[T]here is a path to compliance with the federal securities laws going forward, even where issuers have conducted an illegal unregistered offering of digital asset securities."
The SEC won't kill ICOs!
"[T]here is a path to compliance with the federal securities laws going forward, even where issuers have conducted an illegal unregistered offering of digital asset securities."
The SEC won't kill ICOs!
16/ So the statement makes one significant point about ICOs, but otherwise falls short on delivering clarity to the crypto industry. Now what?
Maybe FinHub will step in to clear some of this stuff up. Or maybe we'll get more guidance from the SEC soon:
coindesk.com/sec-official-s…
Maybe FinHub will step in to clear some of this stuff up. Or maybe we'll get more guidance from the SEC soon:
coindesk.com/sec-official-s…
17/ But I think it's more likely "phase one" (the guidance phase) is over.
The SEC has now addressed most of the major categories of market players (I think the only group they haven't talked about yet is the traders). I don't believe they're planning to give us much more.
The SEC has now addressed most of the major categories of market players (I think the only group they haven't talked about yet is the traders). I don't believe they're planning to give us much more.
18/ If I'm right, "phase two" isn't much fun at all--it's a slow, painful grind where the SEC cleans up the crypto space one settlement at a time.
In a way, that's the right approach. It really *isn't* the SEC's job to make the law--clarity really ought to come from Congress.
In a way, that's the right approach. It really *isn't* the SEC's job to make the law--clarity really ought to come from Congress.
19/ And if you're tired of hearing about regulation & enforcement, I regret to inform you this is only the start.
The securities laws are just one piece of the crypto puzzle. We get to do this all over again with the laws on taxes, money laundering, sanctions, and more.
Sorry.
The securities laws are just one piece of the crypto puzzle. We get to do this all over again with the laws on taxes, money laundering, sanctions, and more.
Sorry.
20/ Some of you are asking:
AirFox & Paragon do also have to give refunds to ICO investors, but only to those who submit timely claim forms & prove that they're entitled to payment. It'll be interesting see how many people do so. In class actions, claims rates are often < 10%.
AirFox & Paragon do also have to give refunds to ICO investors, but only to those who submit timely claim forms & prove that they're entitled to payment. It'll be interesting see how many people do so. In class actions, claims rates are often < 10%.
