Experienced SEC Compliance Attorneys
Do you need assistance on how SEC guidance on cryptocurrency applies to your business plans or project? Are you worried about a possible SEC investigation that would shut down your business? If so, then do not wait to get in touch with our SEC Blockchain Compliance attorneys today.
The SEC is perhaps the most aggressive agency when it comes to investigating crypto investments and blockchain companies for possible violations under the federal securities laws.
If the SEC initiates an investigation, it could lead to fines and penalties, disgorgement orders, injunctions, and more. The key to protect against this is to hire an SEC compliance attorney experienced in cryptocurrencies and blockchain technology.
At Oberheiden, P.C., we have a dedicated team of attorneys who regularly advises clients on current and pending SEC guidance on cryptocurrencies and how that can affect your business plans.
Our attorneys also help with boosting compliance under federal law. Do not let your business become vulnerable to a protracted SEC investigation without getting the advice you need.
Put Oberheiden, P.C. on your side today to resolve your concerns and enhance compliance.
10 Things to Know on SEC Guidance for Cryptocurrencies
The SEC continuously publishes guidances on interpretations for cryptocurrencies and various uses of blockchain technology such as ICOs, De-Fi application, and cryptocurrencies for investors, broker-dealers, and investment advisers.
It is important to be aware of these releases since they indicate the position of the SEC on these issues and possible rules for the future.
Below are the ten most important pieces of guidance and interpretations by the SEC on cryptocurrencies:
1. ICOs, or initial coin offerings, can be securities offerings, thus requiring registration.
Based on the facts and circumstances of each case, your planned coin or token offering could be classified as a securities offering. If so, then your offering will have to be registered with the Commission or fall under one of the applicable registration exemptions.
In order to determine whether your coin or token is a “security,” your counsel will assess whether it is more closely aligned with a “utility token” or a “security token.”
A utility token is offered for consumptive purposes and can only be used within a closed ecosystem. It is not offered for investment purposes and is not correlated to the value of the issuing company.
A security token is offered for investment purposes. Individuals are purchasing these tokens to make a profit as passive investments. The value of security tokens is correlated to the value of the issuing company.
2. Courts and the SEC use the Howey Test to determine whether the coin or token is a “security” versus “utility” token.
The Howey Test has four factors:
- Investment of money;
- In a common enterprise;
- With the expectation of profits; and
- Derived solely from the efforts of others.
Each factor must be satisfied in order for the coin or token to be classified as a “security token.” If one or more elements is not satisfied, then it is called a “utility token” and does not have to be registered.
The Howey Test is a malleable analysis. In addition to the four factors above, courts and the SEC will look to what is actually happening in practice. The marketing efforts and terms of the offer and sale will also be evaluated to make this determination.
3. Calling your new coin or token a “utility token” does not save or protect it against a federal investigation.
Issuers call their coins and tokens many things. In an effort to steer clear of the federal securities laws, many companies are designing their websites and marketing efforts with SEC guidance in mind.
Notably, they are calling their tokens “utility tokens” and are describing how their token has significant consumptive value.
The SEC has made clear that calling your coin or token a “utility token” does not take it out of the purview of the SEC´s jurisdiction nor does it prevent the token from being classified as a “security.”
4. A coin or token that was once a “security” can later transform into something that is not a security and that can later have “utility.”
The SEC has noted that although something is a “security” during the initial funding and launch stages, it can transform later on into something that does not constitute an offering of a security.
Whether this is possible depends on the facts and circumstances of each particular case. But generally, where the initial coin or token provides individuals with a set of rights or financial instruments, it is likely that it cannot transform into a utility token.
However, there are cases where the coin, token, or platform operates in a manner that no longer relies upon a central enterprise or where the coin or token is used only within a limited ecosystem.
In those latter cases, the coin or token may become a utility token.
5. ICOs present a substantial risk of fraud.
The SEC has published many releases and guidances noting the risks of ICOs. Among the chief risk is the high potential for fraud involved in these offerings—those that are typically marketed, purchased, and carried out entirely online.
The SEC has warned investors that many ICOs appear to be honest or genuine investments but are instead frauds in disguise. Many ICOs are also riddled with manipulation, hacking, and pump and dump schemes.
To combat such risks, the SEC has published lists of red flags or warning signs for investors to be aware of when evaluating investment projects.
6. The platform offering the security tokens may have registration obligations.
If a platform offers and facilitates trades of security tokens that are clearly categorized as “securities” under the SEC´s definition, then the platform would likely be acting and operating as an exchange.
In such cases, the platform may have to register as an “exchange” with the SEC or qualify for an exemption from the definition of a national securities exchange.
7. Individuals operating and maintaining the platform with “securities” may also have SEC registration obligations.
Once a coin or token is a “security,” the individuals who work at the company and who are responsible for operating it may have registration obligations.
The SEC regulates investment advisers and broker-dealers under the Investment Advisers act and the federal securities laws, respectively.
In cases where the individual is providing investment advice or projections or otherwise facilitating the trades of securities, these individuals may be subject to SEC registration and regulation (assuming other conditions such as monetary or asset threshold levels are satisfied).
8. The SEC is treating cryptocurrencies and various applications of blockchain technology as highly suspect due to the lack of regulation.
Chair Gary Gensler has stated that investors do not currently have enough protection when it comes to cryptocurrencies. He called cryptocurrencies the “Wild West.”
Gensler also analogized this industry to one filled with fraud, scams, and abusive market practices. What´s worse, according to him, is that investors are often not provided with all information to make informed decisions.
As a result, the SEC has been vigorous in investigating companies and individuals harming investors and capital markets.
9. The SEC has expressed its intention to regulate and investigate alleged violations of the securities laws regarding multiple De-Fi applications.
De-Fi applications are subject to the federal securities laws. The SEC has concluded and announced that merely calling or offering something as “decentralized” or as “governance tokens” does not take it out from the SEC´s jurisdiction.
The SEC has an obligation to ensure that the De-Fi market is operating under the law and to ensure the greatest protections for investors. This includes various De-Fi applications such as yield farming, crypto mining, staking, and crypto loans, as some examples.
10. Failure to follow the federal securities laws when required to do so can lead to substantial penalties, which the SEC is aggressive in enforcing.
The SEC will not hesitate to apply penalties, disgorgement orders for all ill-gotten gains, impose injunctions, and cease-and-desist orders. This can wreak havoc on a project and overall business operations of a company due to the immeasurable reputational harm.
In cases where criminal activity is also suspect, the SEC will either work in conjunction with or hand the matter over to the FBI or DOJ.
Need Advice with SEC Guidance on Cryptocurrency?
Understanding the SEC´s advice in the cryptocurrency and blockchain industry is critical for businesses seeking to enter the area. The costs of an SEC investigation are not worth the time, expense, and manpower put into a crypto investment or project.
Before you launch a crypto-related project, hire an attorney experienced in such issues. At Oberheiden, P.C., we have a dedicated team of Blockchain Compliance attorneys who can provide a comprehensive compliance evaluation of your project under the federal securities laws.
Do not risk a federal investigation. Get the advice you need first.
Call or contact us today for a free and 100% confidential consultation.