In June 2019, the SEC asked for comment on a list of possible amendments to its rules to simplify its “overly complex exempt offering framework”.
Now, after nearly a year and half, these amendments have finally been made official.
While it’s somewhat difficult to see how 388-pages of amendments will simplify things for businesses, there are a number of slight tweaks to the requirements for registration exemptions that will undoubtedly be of benefit to crypto projects when conducting ICOs.
These adjustments primarily include raising the threshold of capital that projects can raise under exemptions before they are required to register with the SEC.
Among the list, however, there is one amendment that stands out for the crypto industry in particular, catching the attention of several crypto law pundits.
This involves new rules to provide ‘Safe Harbor’ from the integration of separate offerings, which was one of the key elements in the Kik and Telegram cases.
Read on to learn what these new safe harbor provisions are and how they will impact the crypto space.
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SEC Amendments Provide Safe Harbor from the Integration of Separate Offerings
In order for an offering to qualify for a registration exemption with the SEC, it must abide by a number of rules. For example, under Rule 504 of Regulation D, a company can raise up to $10 million (this was just raised from $5 million in this amendment), but only from accredited investors.
If a company holds a single private offering, it may be pretty straightforward for the company to demonstrate to the SEC that it only solicited accredited investors for its offering. But, if the company conducts a public offering at the same time or soon after, things can get messy.
In many cases, while the company may think that it has conducted two separate offerings, the SEC may argue that in fact, these were just two parts of the same offering. This is what the SEC calls an integrated offering.
So if the project solicited the general public for one of those offerings, then both offerings may be disqualified from a registration exemption, putting the company in violation of securities law.
This idea of integrated offerings played a big role in the SEC’s cases against both Kik and Telegram. Though both projects thought that they had followed the rules to qualify for an exemption with their offerings, the SEC thought otherwise.
Now, with this new rule, the SEC is allowing safe harbor from integration for offerings that are held 30 calendar days after another offering has been completed or terminated. Given, of course, that the exempt offering still abides by the requirements to qualify for a registration exemption.
Of course, the key question now is, with this new safe harbor clause could things have turned out differently for Kik and Telegram?
Would the SEC’s Amendments Have Changed the Outcome of the SEC’s Case Against Kik?
To quickly recap the Kik case, the project held two token offerings. The first was a pre-sale of its Kin token for private investors and then the next day it held a token sale for the general public.
Clearly, these two sales were not 30 days apart. But assuming that Kik had known about this new safe harbor clause and had planned its token sale to take place 30 days after the end of its private sale, would that have changed things?
The short answer is no.
This is because Kik’s second token sale took place before the development and launch of its network and was sold to the general public.
This meant that investors purchased the Kin token not for immediate use but with the expectation that they would be able to use those tokens once Kik completed its platform at some point in the future. This was a bet on the Kik team and thus qualified the purchases as an investment contract. Of course, this would have been acceptable in an exempt offering, but not in a public offering.
The bottom line is that even if Kik’s two sales were not considered to be integrated, it is very likely that Kik’s second token offering would have still been considered an unregistered security offering.
What About SEC vs Telegram?
Like Kik, Telegram also held a pre-sale offering and had planned a separate offering to the general public.
In this case, there were many more than 30 days between the offerings, so it is possible that Telegram would have benefited from the SEC’s safe harbor allotments.
That said, since investors in the first offering were able to resell their contractual rights freely, it is possible that the SEC could have argued that the first offering had not been fully completed at the time of the second offering. This would have impacted the project’s ability to qualify for safe harbor.
Regardless, the much bigger issue in the Telegram case is that its first token offering gave investors in the TON token pre-sale rights to purchase the GRAM token, which it planned to sell in the second offering.
Though Telegram considered the GRAM to be a utility token, the SEC didn’t see it that way. The regulators argued that investors in the first offering weren’t promised returns from the TON token, but from the GRAM token. Thus it was actually the GRAM that formed the basis of the investment contract.
In the end, though Telegram issued two separate tokens in two separate offerings, since the first offering promised returns based on the second token’s value, this made the second token offering part of the original investment contract.
In summary, the SEC’s new provision of a 30-day safe harbor for the integration of token offerings would not have significantly changed the results of the Telegram case either.
What Does This Mean for Crypto Law Insiders?
In essence, while the SEC’s new amendments provide more leeway for companies conducting securities offerings in general, they do not significantly change the situation for crypto projects and digital token offerings in particular.
Given that, my advice to crypto projects looking to conduct token offerings remains the same: all token offerings must either be registered or fit within an exemption. For those projects looking to have more than one offering separating the offerings by 30 days is a smart move, but by no means ensures qualification for an exemption.
As I’ve previously recommended, all token sales that take place before the network is alive should be considered a straightforward equity raise.
Then, once the network is ready, the project can hold a second token sale for the platform’s utility token. It is essential that a utility token sale takes place only after the network is sufficiently developed. Until then, the token can and will be considered an investment contract. To learn more about How to Conduct a Compliant ICO read here.