Thread by @propelforward

We've got a new proposed #SEC #token #safeharbor that would let issuers offer tokens in the US. It's big. But, what's new? How is it different from the prior proposal? What's new? You guessed it. It's unavoidable, It's inevitable. It's a #THREAD. Let's dive in/1

Right off the top, we have the elimination of the "good faith" provision that was previously implied upon the issuers in a(1) & of a(4) which required the issuer to act in good faith to "create liquidity for users." /2

New section a(5) includes reference to the new "Exit report" which is a new requirment defined and explained further down but tldr; its a report issued by the issuer's counsel that asserts whether the tokens will be a security or not after the 3 year period. Good inclusion /3

section b(v) is interesting; it contemplates that tokens may have been sold prior to the notice of reliance on the safe harbor having been issued by the issuer; this previews a BIG change further down- this rule can be relied upon by issuers whose tokens are already out there /4

by way of private placement (i.e. exemption) or in an offering that violated rule 5 (i.e. was improperly unregistered). this is a path to fixing prior defective issuances. We'll talk about this later... /5

section b(iii)(E) also requires a new disclosure- the tokens need to have a block explorer. This makes sense & is good- its more disclosure. /6

section b(vi)(C) includes a disclosure of Related Persons (defined later) who recieved tokens "in a manner that is distinct from how any third party could obtain Tokens." Disclosing Insider transactions = good. /7

More disclosure of related party transactions in b(1)(ix)- including description of the nature of the transaction, the Related Person, the basis on which the person is a Related Person, and the approximate value of the amount involved in the transaction. /8

new: section b(1)(x) includes a mandatory "Warning to Token Purchasers." A statement that the purchase of Tokens involves a high degree of risk and the potential loss of money. /9

section b(2) would require a semi-annual update (i.e. every 6 months) to the mandatory disclosures. This replaces the prior requirement of updates when there are material changes to report. This is probably better. /10

(c) requires the notice of reliance to be filed before the first Token is sold; this is a change from prior draft which allowed the notice to be sold 15 days after the first sale, ala Form D. The notice is streamlined but not materially changed. /11

(f) introduces the #exitreport, which is to be prepared by counsel for the issuer, making a determination whether the network has reached maturity or not after 3 years. We now distinguish between maturity for networks focused on #Decentralization & #functionality /12

for #decentralization focused networks, counsel will evaluate: the extent to which decentralization has been reached across a number of dimensions, including voting power, development efforts, and network participation. If applicable, the description should include: /13

Examples of material engagement on network development & governance matters other unaffiliated parties, Explanations of quantitative measurements of decentralization, explanation of how the (issuer's) pre-Network Maturity activities are distinguishable from their ongoing /14

involvement with the network, including the extent to which the (issuer's) continuing activities are more limited in nature & cannot reasonably be expected uniquely to drive an increase in the value of the filing of the Tokens;
confirm that the (issuer) /15

has no material information about the network that is not publicly available; and describe the steps taken to communicate to the network the nature and scope of the (issuer's) continuing activities. /16

for a #functional network, different factors: analysis should describe the holders’ use of Tokens for the transmission & storage of value on the network, participation in an application running on the network, or ...in a manner consistent with the utility of the network & /17

Detail how the Initial Development Team’s (i.e. issuer's) marketing efforts have been, and will be, focused on the Token’s consumptive use, and not on speculative activity. /18

Hot Take analysis: these are good rules but these are likely the beginning, not the end of the analysis that counsel will undertake. /19

Of course, not every token will make it; if the (issuer) determines that Network Maturity has not been reached, the following information must be provided: the status of the project and the next steps the Initial Development Team intends to take, /20

Contact information for Token holders to communicate with the Initial Development Team and a statement acknowledging that the (issuer) will file a Form 10 to register under Section 12(g) of the Securities Exchange Act of 1934 the Tokens as a class of securities within 120 days/21

so, if after 3 years you don't make it, you're filing a form 10 as a security. /22

BIG NEW INCLUSION: section (g) would appear to give exchanges that facilitate trading in these tokens 6 months to sunset them after a determination that the network did not mature. HUGE clarity for trading. US cryptocurrency platforms rejoice.

Section (h) would allow Tokens sold via private placement or in violation of Rule 5 (i.e. unregistered security!!!) to qualify for the safe harbor. This is a huge change & creates a path for various tokens of unclear legal status to use the rule. but... details matter /24

this would allow unregistered offerings to use the safe harbor if they didn't comply with section 5 of the 33 Act as determined in a Commission order pursuant to Section 8A of the 1933 Act & as long as they do not identify any other violations of the federal securities laws /25

so, maybe we'll see a massive wave of Section 8A settlements/consents to "clean up" unregistered offerings using this proposed rule. /26

we've got a new definition of "network maturity" in section k(2) which excludes any network where the (issuer) owns +20% of the tokens or +20% consensus mechanism control. Interesting line to draw. /27

section k(3) offers a new definition of Related Person and includes the initial development team, directors, advisors and relatives of those persons. /28

bad language on section k(4); the definition of "token" includes "a transaction history" that "cannot be modified." Every transaction on any blockchain including on #bitcoin "can" be modified. It's just highly unlikely. /29

Satoshi talked about "computationally impractical to reverse" in the #bitcoin whitepaper; the marketing spinmasters gave us "immutable," which stinks. I hate it when it shows up in statutes and in rules, even in a more benign form. /30

Summary: The new version of the rule adds the Exit Report requirement, clarifies the role of counsel, the potential use of the rule to fix existing defective issuances, gives exchanges clarity, & calls for more frequent reporting. It's a solid upgrade. More analysis to come! /end