Over the past year, it’s become clear that the SEC is ready to take on anyone in the crypto industry, even the biggest projects in the space.
The trouble is, it’s not a fair fight.
Even if the rules aren’t clear or if the SEC changes its mind later down the line, the way the law stands, that’s your problem, not the SEC’s.
In practice, this means that once the regulatory agency decides that a token offering violates securities laws, the issuer has only two options. Settle as quickly as possible or die fighting.
So far, no one that has tried to fight back has survived.
One group is working hard to even the playing field, pointing out the great injustice with the current system.
Last year, I had the pleasure of meeting Kristin Smith, the Executive Director of the Blockchain Association at Consensus 2019.
I was impressed with her and the Association. And over the past few months I’ve seen just how critical their work is for the entire crypto industry.
This week I’ve asked Kristin for an interview to discuss the Telegram case and what this means for the community at large.
Read on in today’s interview to get the inside scoop on the future of token offering regulations.
Do you think that the SEC’s stance on security token offerings is becoming clearer or more ambiguous with time?
The SEC has always been clear that a security token offering must comply with the securities laws or attain a valid exemption, but the SEC’s stance on what constitutes a security token offering has become more ambiguous.
The SEC has publicly signaled a position that it now seems to be contradicting in the courts. For example, the SEC has publicly stated that private placement investment contracts (securities) are discrete from underlying tokens, which themselves may not be securities.
The SEC’s Director of Corporation Finance William Hinman has stated that a “token — or coin or whatever the digital information packet is called — all by itself is not a security, just as the orange groves in Howey were not.” SEC Commissioner Hester Peirce has explained that “conflating the two concepts [of the investment contract and the underlying asset] has limited secondary trading and has had disastrous consequences for the ability of token networks to become functional.”
Yet, in the Telegram case, the SEC’s case relies upon conflating the two concepts by arguing that purchasers of the private placement investment contracts would be acting as underwriters in an illegal securities offering if the purchasers went on to sell their underlying tokens.
In other words, the SEC is attacking a purchase agreement framework our industry designed specifically to comply with the letter and spirit of the SEC’s existing securities rules and in response to SEC officials’ numerous public statements differentiating between investment contracts and underlying assets.
What impact do you feel the SEC’s increasing actions against securities violations are having on the crypto industry?
Bad actors violating securities laws and regulations should always be punished, but the SEC’s seemingly fluid view of what constitutes a securities violation in the crypto space has stifled innovation in the United States.
Without regulatory clarity and legal certainty, innovators cannot build.
Indeed, the crypto industry is actively seeking a clear delineation of what is and is not a security in the crypto space so that the blockchain and crypto industry can thrive here in the United States.
How would you explain Telegram’s legal arguments against the SEC in a simple manner that any layperson can understand?
SEC Chairman Jay Clayton has used an analogy that fits the Telegram case well: if a theater company were to promise discounted tickets to individuals willing to invest in a future, yet-to-be-developed show, that transaction would likely be considered an investment contract and therefore a security. However, once the show had been developed and the early investors had received their discounted tickets, the tickets themselves would not be considered securities.
The analogy holds in the Telegram case: no one disputes that Telegram’s privately placed contracts to deliver Grams to accredited investors amounted to investment contracts and therefore securities, and as such, Telegram entered into these contracts only with accredited investors in compliance with a valid exemption (Regulation D).
Telegram’s case argues that its “tickets,” in this case the gram tokens, are not securities in and of themselves, and therefore the sale of grams does not constitute a securities violation.
In Telegram’s case, do you believe that the company chose to make a stand against the SEC more on ideological or practical grounds?
Telegram’s case stands on solid legal arguments. Telegram sought clarity from the SEC on its plan, designed its investment contract and token distribution specifically to comply with the United States’ securities laws and regulations, and is being prevented from distributing its tokens now that its network is functional.
What do you believe is at stake in the SEC vs. Telegram case for the crypto industry as a whole?
As the Telegram case is one of the first cases to examine the token presale model, and given the general lack of a clear legal and regulatory operational environment for the industry, the outcome of the case will have a significant effect on the industry’s development going forward.
Any nascent industry—particularly one involved in financial and monetary services—will experience “growing pains” as it matures and gains traction. In a way, the intense scrutiny of crypto is a product of the industry’s existing traction and its potential to fundamentally change the ways in which people transact with one another.