BitBlog Bi-Weekly Update: MARCH 17, 2020
When we started thinking about this update, less than two weeks ago, the proposal by the U.S. Securities Exchange Commission (“SEC”) to liberalize Reg A and Reg CF (as discussed below) was the biggest news on our minds…. How long ago that feels! Most important now is your safety and health.
“It Won’t Be Like This For Long”
With the world facing the impact of COVID-19, there are more questions than answers on how this crisis might affect FinTech firms and the traditional financial services industry. The recent precipitous drop in the price of several digital currencies, including Bitcoin, has called into question some of the assumptions and theories that underpin the purported decentralized financial system. The COVID-19 pandemic may demonstrate the benefits of a centralized financial authority, contradicting a major theory of digital currency enthusiasts and developers — that decentralization is preferable to control.
Thus far the price of Bitcoin and other cryptocurrencies and digital commodities have not acted as a hedge against the stock market as many hoped or expected. Proponents of digital assets claim this does not mean that Bitcoin and other digital assets are not a hedge against long term chaos or market dislocation. Digital asset enthusiasts claim, the increased government spending and likely decreased revenue point to the potential value of a non-governmental based asset. All that the recent price collapse shows is that from an investor point of view cryptocurrency is seen as a risky asset.
As a counterpoint to, this crisis has demonstrated a fundamental weakness in the traditional forms of transmitting information, as the level of distrust in recent novel COVID-19 virus data (even if there is no evidence of data manipulation) and the spread of rumors could argue for a blockchain type transparency and immutability of data. Furthermore, the trend of social distancing further underscores the need for technology that better allow society to interact from afar.
“Take the Money and Run” - SEC Proposes to Ease Capital Raising Rules
The U.S. Securities and Exchange Commission (the “SEC”) recently released a set of proposed rules designed to promote capital formation and expand investment opportunities for offerings of securities made under Regulation A (“Reg A”) and Regulation Crowdfunding (“Reg CF”). Both Reg CF and Reg A are regulations that allow for the sale of securities to the public without meeting the requirements of a registered offering, such as an IPO.
While Reg A is geared for small- to medium-sized companies, it still requires significant documentation and disclosure, as well as SEC staff review and approval of the offering circular. Reg CF (Crowdfunding) is geared for small capital raises and as such requires much less in terms of documentation and costs much less than even Reg A. While Reg A+ has opened up the public markets to some smaller companies (with it being the most popular option for public sales of digital assets and security tokens in the US), both of these regulations have proven unwieldy. Regulation CF is little-used because of its very low offering limit, making it a very expensive means of raising capital and the vast majority of offerings by these companies have been through the traditional Regulation D private placement.
The SEC hopes to increase the use of these exemptions from registration by increasing the offering and investment limits within each Regulation. The proposed rules seek to raise the maximum offering amount under Tier 2 of Reg A, a/k/a Reg A+, from $50 million to $75 million along with raising the maximum offering amount for secondary sales (i.e., resales) under the same Tier of Reg A from $15 million to $22.5 million. The SEC hopes to increase participation in Reg CF by boosting the offering limit from $1.07 million to $5 million and by amending the investment limits for Reg CF investors. Additionally, the SEC proposes to allow an unlimited number of accredited investors to participate in a Reg CF offering which should make Reg CF more attractive, should issuers to do just one offering for both public and accredited investors. The proposal contains a number of other provisions that would improve capital access, including:
Exempting demo days from the definition of “offer” (which would be extremely helpful in ensuring an exemption is not blown just because someone is giving a presentation on a proposed token at a conference);
Making all sales made overseas in compliance with Regulation S exempt from integration (which often was a problem with SAFTs and ICOs);
Ensuring that there is no ‘backward integration’ of offerings where sales begin privately and then subsequently pursuant to an exemption that permits public marketing or solicitation;
Generally making it much more clear when offerings relying on different Securities Act exemptions might be treated as part of the same offering, and shortening the cooling-off period when an exemption is blown;
Expanding the circumstances where a company can seek indications of interest; and
Consideration of making the issuance of SAFEs permissible under Reg CF.
As popular means of attempting to sell digital assets that are securities to a broader audience, we at the BitBlog believe these proposed rule changes are welcome and would be helpful to the FinTech community. This does not, however, change the current backlog of issuers already attempting to sell digital assets that are securities pursuant to Reg A.
The proposal is subject to public comment for a sixty (60)-day period following the publication in the Federal Register. Given the current circumstances as well as the high public interest in this package of proposed rules (which contains an overhaul of many provisions of laws pertaining to securities offerings), it seems likely, though not certain, that this comment period will be extended. Keep an eye out for a more comprehensive analysis from Polsinelli’ s Fintech and Regulation Practice and Security Law Practice on how these proposals might affect your fundraising endeavors in the near future.
Whac-a-mole – Another Illegal ICO
The enforcement actions against initial coin offerings (ICOs) continue with the SEC obtaining a judgment against an ICO “incubator” called ICOBox and its founder for an unregistered offering of securities and acting as an unregistered broker-dealer. The SEC was awarded a default judgment ordering the defendants to pay disgorgement and prejudgment interest totaling $16,059,428.99 for conducting a $14.6 million securities offering and facilitating other initial coin offerings that raised more than $650 million for dozens of clients without bring a registered broker-dealer. Given that this is a default judgment, collection is far from certain.
India’s Top Court Lifts Ban on Crypto Trading by Banks
Ding a few years of uncertainty in a long and thought-out opinion the highest court in India overruled the Reserve Bank of India (RBI), to allow Indian banks to engage with cryptocurrency exchanges. The RBI had banned dealing with engages over "concerns of consumer protection, market integrity and money laundering, among others." This ruling is likely to open up the Indian market to a much greater crypto penetration in the country which up until now has been fairly minimal.
If You Can’t Beat’em, Join ‘Em - Coinbase’s Chief Legal Officer Resigns to Join OCC
The Chief Legal Officer of Coinbase recently announced he is leaving leading digital asset trading platform, Coinbase to join the Office of the Comptroller of the Currency (“OCC”) as Chief Operating Officer. This new is extremely promising because Brooks is a thought leader on financial services regulation and a well known supporter of digital assets. Comptroller of the Currency, Joseph M. Otting, noted, “Brian brings an extensive career of legal, banking, and financial innovation expertise to the agency . . He is a visionary thinker with a passion for service and a deep understanding of how the financial services industry supports our nation's prosperity. We are fortunate to attract such an experienced and talented individual to join our federal agency.”
 SEC Release No. 33-10763, Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets (March 4, 2020), available at: https://www.sec.gov/rules/proposed/2020/33-10763.pdf
 SEC Obtains Judgment Against Ico Incubator and Its Founder for Unregistered Offering and Unregistered Broker Activity, Litigation Release No. 24763 (March 10, 2020), available at: https://www.sec.gov/litigation/litreleases/2020/lr24763.htm
 News Release 2020-33, Brian P. Brooks Named OCC Chief Operating Officer (March 16, 2020), available at: https://occ.gov/news-issuances/news-releases/2020/nr-occ-2020-33.html.