SEC Commissioner Peirce Announces Support for the Creation of SEC Safe Harbor for Digital Token Sales in the United States
On July 30, 2019, SEC Commissioner Hester Peirce announced her support in the establishment of a ‘non-exclusive safe harbor’ exemption from registering as securities offerings for digital token sales in the United States. Known to the blockchain community as “Crypto Mom,” Commissioner Peirce was speaking in Singapore during a keynote address at the SUSS Convergence Forum, co-sponsored by RockTree LEX, which brought together the leaders of securities regulators in the United States and Asia, including the Singapore MAS, among others. Commissioner Peirce also announced she is seeking feedback from top blockchain lawyers and cryptocurrency industry leaders of how the SEC could define digital tokens and under what specific conditions the safe harbor would be available. RockTree LEX will be a part of those discussions with the SEC in helping develop new rules and policy.
The progressive announcement from the SEC comes off the back of a highly active month which saw open-door and closed-door meetings with the US Senate and Congress in Washington, DC about blockchain and cryptocurrency policy and rules in response to Facebook’s Libra project, and echoed the common message that the US is falling behind in the new economic race of blockchain technology and cryptocurrencies.
Commenting on SEC Commissioner Pierce’s announcement, Omer Ozden, CEO of RockTree LEX, who was one of the members at the meetings with Senate and Congress in Washington, DC last week, said:
“This has been a major month for Blockchain and Cryptocurrencies, as the top leaders in major countries have woken up to what this technological race means for their economies and long term competitiveness. In our meetings with Congress, we were impressed at their level of understanding of the benefits of cryptocurrencies and blockchain, and also saw their concern that both small and major technology companies like Facebook, were now seeking legal structures offshore to continue their innovation. With our unique international perspective in law and investment which spans Greater China and North America, we delivered a personal message to Congress which called for greater action, and our specific opinions on how the US government should approach regulating blockchain and cryptocurrencies in order to allow innovation to flourish.”
He also added that “Commissioner Pierce’s support in the establishment of a safe harbor framework for the sale of utility tokens will provide untold benefits and unlock US innovation, which reflects, we believe, a very recent trend of permissiveness by the SEC.”
The trend Ozden was referring to with the SEC relates to other progressive regulatory occurrences during this the past month. On July 10, 2019, Blockstack, a technology company developing a new blockchain network (the Blockstack network) for decentralized applications, received approval from the SEC for its offering of Stacks Tokens under Regulation A of the Securities Act of 1933 (the “Securities Act”). This was quickly followed by the SEC qualifying the offering of Props Tokens by YouNow, which is building a blockchain-based digital medial platform (the Props Network).
These are the first-ever Regulation A digital securities offerings to be qualified by the SEC. Previously, security token offerings in the US were being conducted either through Regulation D under the Securities Act, which generally only allowed accredited investors to participate in the offering and restricted resale of the tokens for 12 months, or Regulation S under the Securities Act, which allowed US or foreign issuers to sell tokens outside of the US but resulted in a compliance period of up to 12 months where the tokens could not be sold to U.S. persons. Through Regulation A, the Stacks Tokens and Props Tokens can be legally distributed to anyone in the US and are freely tradeable after the initial purchase.
More importantly, the Stacks Tokens and Props Tokens are both utility tokens. The Stacks Tokens are the native tokens of the Blockstack network and are to be used to transact on the network (such as creating digital assets or burning tokens for fuel). The Props Tokens serve as the currency of payment in the Props Network. Both Blockstack and YouNow have noted that they anticipate their tokens being treated as securities under the recent guidance provided by the SEC “Framework for ‘Investment Contract’ Analysis of Digital Assets” and the application of the Howey test for the foreseeable future. However, the tokens may in the future be determined to no longer constitute securities under US law as relevant legal and regulatory standards develop and their respective networks become so decentralized such that purchasers no longer reasonably expect the issuers to carry out essential managerial or entrepreneurial efforts. Such a determination would likely culminate in a no-action letter from the SEC.
Additionally, on July 25, 2019, the SEC issued a no-action letter to Pocketful of Quarters in respect of its Quarters tokens, which is a universal virtual currency for gaming. Notably, this is the first ERC-20 public blockchain token approved for sale without needing to be registered under US law. Notably, Quarters are essentially stablecoins in that they will be made continuously available at a fixed price and are sold to gamers solely for consumptive use as a means of purchasing in-game items or participating in e-sports tournaments. Quarters cannot be traded in secondary markets. In addition, funds from Quarters will not be used to build the Quarters platform as it has already been developed and was funded through investment tokens, which were issued to investors under Regulation D.
Ozden added, “We welcome Commissioner Peirce’s support of innovation, and the increased appetite by government in the United States and other jurisdictions to engage industry and progress in bringing clear regulatory oversight of digital token activity. At RockTree LEX, we believe that in blockchain, law is also technology: to be a successful blockchain project, you need to understand legal compliance and options around the globe, and to be a successful nation of innovation, you need to develop a regulatory framework that encourages innovation to unlock growth. As a global blockchain legal platform and an investor, RockTree LEX is committed to assisting government to help shape progressive regulatory frameworks so they can unlock technological and financial growth for their economy.”