We Can Help You Launch an SEC Compliant Token Offering
There are more ways than one to launch an SEC Compliant ICO, or Securities Token Offering (STO),
in the U.S. In April 2012, the JOBS Act was written into law to enable ordinary investors, the
“crowd,” to
invest in private placements of securities previously open only to high net worth individuals,
or “accredited investors” (as that term is defined by the SEC). The JOBS Act
indirectly created a new
framework within which there are multiple ways you can conduct an ICO, or STO, exempt from the
registration requirements of the federal and state securities laws. Under the JOBS Act,
compliant token offerings can be
carried out within the following SEC regulations – Regulation CF, Regulation D, Regulation
S, and Regulation A. Our business lawyers can
advise you on how to structure your token offering to fit within one or more of these regulatory
exemptions.
Regulation CF
Under Regulation CF, you can raise up to $1,070,000 in any period of 12 consecutive months by
selling your tokens, or securities convertible into tokens, to accredited and non-accredited
investors alike. Your
offering must be conducted on an SEC registered, equity crowdfunding platform, or portal. The
securities that you issue will be “restricted securities” that, subject to certain
exceptions, must be held by
the buyers for a period of 12 months. There are limitations on how much non-accredited investors
can invest. Also, your company, as issuer of the tokens being offered, must be a company
organized in the United
States, although the U.S. does not need to be your principal place of business. The SEC mandated
disclosure requirements for a Regulation CF offering are not overly burdensome, and a Regulation
CF crowdfunded
offering is a relatively inexpensive way to raise capital. A Regulation CF offering is exempt
from the securities registration requirements under state law.
Regulation D, Rule 506
Rule 506 (c) under Regulation D lets you raise an unlimited amount of money. You may broadly
solicit and generally advertise your Red D, Rule 506(c) offering to the general public, so long
as your sales are made only
to accredited investors. We note that in 2017, Filecoin raised more than $200 million in a
Regulation D, Rule 506(c) token offering.
We can help you structure your Regulation D, Rule 506(c) offering and we can help you draft your
offering documents, investment agreements, and advertising materials as well as comply with all
post-sale federal and
state filing requirements. Although no specific disclosure requirements apply to Regulation D
offerings, as a practical matter, disclosure requirements for a Regulation D, Rule 506(c)
offering (i.e., the disclosure
contained in a typical private placement memorandum) are more burdensome than for a Regulation
CF offering, and you must take extra steps to verify accredited investor status. On the plus
side, there are no caps on
the amount of money you can raise, and you can advertise your token offering widely, to help
build your community. A Regulation D, Rule 506(c) offering tends to be more expensive than a
Regulation CF offering, but
less expensive than a Regulation A offering (discussed below). The sale of securities under
Regulation D involves “restricted” securities (except for in certain limited
circumstances) and you and your
investors must be comfortable with the required 12-month holding period.
Regulation A
Regulation A is a JOBS Act enhanced exemption from the registration requirements of the various
state and federal securities laws that, under certain conditions, will allow you to sell up to
$50 million in tokens or
token related investments in any period of 12 consecutive months. A Regulation A offering
requires the filing of an offering statement on Form 1-A with the SEC, which, subject to review
and revision pursuant to SEC
comment, is “qualified” by the SEC. Regulation A allows you to offer and sell your
company’s securities tokens to the general public, subject to certain investment limits
for non-accredited
investors. Under Regulation A, all tokens or other securities that are sold are fully and freely
tradable, with no resale restrictions, except for those you may want to impose under your token
offering framework.
Disclosure requirements for a Regulation A offering are more rigorous than for a Regulation D or
Regulation CF offering, and typically more expensive as well. As a plus, Regulation A lets you
file your Form 1-A with
the SEC for confidential review on a “quiet” basis allowing you to “test the
waters” and build a following prior to publicly filing your offering statement to obtain
SEC
“qualification.” To make use of Regulation A, however, you must be a U.S. or
Canadian organized company with your base of operations in the U.S. or Canada. With our broad
understanding of the Regulation A
environment, we can help you plan, structure, file and qualify your Regulation A token offering
while limiting your costs and maximizing your chances for a successful offering.
Regulation S
Offers and sales of securities tokens under Regulation S must be conducted outside the U.S. and
only to “non-U.S. persons.” Tokens or investment contracts such as SAFTs sold in a
Regulation S offering
will be restricted securities and holding periods will apply. Because of the restrictions
against sales in the U.S. or to U.S. persons, compliance structures need to be rigorously
applied. For example, if you want to
take advantage of this exemption from the U.S. you will need to set up a geofence to block I.P.
addresses in the U.S from your Regulation S offering website landing page.
Combination Offerings
You may want to consider conducting a Regulation CF crowd funded offering concurrently with a
Regulation D, Rule 506(c) private placement offering, or a Regulation D, Rule 506 offering with
a (more complicated)
Regulation S offering. This, in the first instance, will let you sell to non-accredited
investors as well as accredited investors, thus enabling you to expand your community of token
holders to the broader public,
and with the addition of a Regulation S component, you can take advantage of off-shore, non-U.S.
investors. We can counsel you on the pros and cons of such a combined offering with optimally
structure such an
offering to be regulatory compliant.
SAFT (Simple Agreement for Future Tokens) or Securities Token Purchase Agreement
A SAFT, or Simple Agreement for Future Tokens, similar to a SAFE (Simple Agreement for Future
Equity), is an investment contract that converts at a future date into a token. The SAFT can be
used during the ICO
pre-sale phase, when your network or token platform may not be up and running and you may not be
ready to set a value on your to-be-issued, future tokens. The SAFT cannot, however, be used as a
tool to circumvent the
federal securities laws – the token that you issue upon conversion of the SAFT may very
well be a securities token governed by all applicable securities laws and you will need to plan
for the issuance of that
securities token accordingly.
We can counsel you on whether you should issue a SAFT or bypass the SAFT and directly issue a
securities token, and we can help you draft your SAFT of securities token purchase agreement,
depending on your needs and
circumstances.
Bounty Programs, Airdrops, and other Promotional Activities – We Can Counsel You on Legal
Compliance
Celebrity-endorsed ICOs such as those by Paris Hilton and Evander Holyfield have raised red
flags with the SEC because offering incentivized rewards to help promote ICOs may be in
violation of the anti-touting and
broker/dealer provisions of the federal securities laws. If you pay people to endorse or
otherwise promote your token offering, whether in cash or in tokens, and the tokens you are
offering to the public are deemed
to be securities, all compensation paid to such persons must be fully disclosed and their public
statements must not be misleading in any way. If you pay such persons based on the amount of
tokens they help sell,
these persons could be deemed to be securities brokers or dealers and must be registered as
such. Failure to be registered as a broker/dealer, if required, would be a violation of federal
and state securities laws
and, if not careful, you could be deemed to be aiding and abetting any such violations.
Bounty Programs, in which people or companies are awarded free tokens for endorsing ICOs or for
otherwise performing various tasks necessary to the successful completion of an ICO, may involve
the unregistered sales
of equity securities. Although bounty programs are a great way to get your community involved in
your token offering, or to get needed activities such as white paper translations performed
without spending cash or
cryptocurrencies, bounty program token payments may be unregistered sales of securities in
violation of applicable laws, and statements that bounty program recipients make on their social
media feeds, if not properly
monitored, scripted and controlled by you, may end up violating federal or state regulations.
“Air Drop” programs whereby a company’s supporters are issued free tokens may
also violate federal and state securities laws. You may want to reward your community or kick
start your network or
platform by sending free tokens to your token users or supporters. Even though air drop token
recipients will not pay you anything for these tokens, you may be deemed to have received
consideration, for example, in
the form of added liquidity to your token market. If your tokens are securities tokens, an air
drop distribution may be an unregistered sale of securities in violation of applicable laws.
If you are interested in utilizing the services of celebrities or other promotors for your token
offering, you are planning a bounty program or you want to conduct an air drop of your tokens,
we can help you analyze
your planned activities in a securities law framework and make sure that whatever you do is
compliant with all applicable US and state securities laws and regulations.
The Uncertain Regulatory Landscape
U.S. Laws and Cryptocurrency Regulation
Cryptocurrency has commanded the attention of regulators such as the Securities and Exchange
Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Federal Bureau of
Investigations (FBI), the U.S.
Department of Justice (DOJ), the U.S. Department of the Treasury through the Financial Crimes
Enforcement Network (FinCEN), and the Internal Revenue Service (IRS). Certain existing laws and
regulations are currently
being applied to the new ICO landscape, and this can be seen, for example, in the various
pronouncements and actions being taken by the SEC to return the ICO industry to the four corners
of existing securities
regulation. New laws and regulations will most likely be passed in the future, to adapt to the
new economic realities being created by blockchain, cryptocurrency and tokenized ecosystems, and
to foster market
stability, integrity and the confidence of investors, prevent fraud, tax evasion, money
laundering and other potentially illicit activities, and to create an environment in which
blockchain, cryptocurrencies, and
token economies will be able to flourish. Several states, including Arizona, Wyoming, and
Vermont, have already passed laws related to cryptocurrencies and initial coin offerings, and we
expect that this trend will
continue.
As you contemplate your planned token offering, there are many laws that you need to be aware
of, for example, the Federal Bank Secrecy Act (BSA) and the anti-money laundering (AML)
regulations, in addition to the
federal and state securities laws. The legal and regulatory landscape is complicated and
ever-changing. Our lawyers are familiar with existing regulations, past prosecutions by the
Department of Justice, SEC
Enforcement Actions, and FinCEN regulatory actions, and we continuously monitor this dynamic and
evolving environment. We can help you understand your legal obligations as you move forward with
your token offering,
and we can advise you as to how to safely structure and conduct your offering in a legally
compliant way.
Do you have questions about U.S. laws and regulations on cryptocurrency and token offerings?
Contact our blockchain lawyers today at (202) 869-0888 or
info@bevilacquapllc.com to
schedule a meeting. If you want to read more about U.S laws and regulations on cryptocurrency
and token offerings, see our
whitepaper or our blog.
