May 8, 2021

Volume XI, Number 128

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Peircing the Decentralized Autonomous Organization Veil

U.S. Securities and Exchange (SEC) Commissioner Hester Peirce, referred to by some as “crypto mom” for her support for blockchain technology and cryptocurrency, was nominated on June 3, to serve a five-year term. Peirce is currently one of four SEC Commissioners appointed by the President of the United States with the advice and consent of the Senate. One Commissioner is currently to be named by the President. Their terms last five years and are staggered so that one Commissioner's term ends on June 5 of each year.[1] 

Commissioner Peirce was initially appointed in early 2018 to fill a vacancy, scheduled to expire in early June 2020, although a Commissioner is permitted to stay in the position for up to 18 months after her term until the confirmation of a successor.  Assuming Commissioner Peirce is approved by the U.S. Senate, her term will extend until June 2025.

In a 2018 speech Commissioner Peirce advocated an application of the “Howey test”[2] that would require a nuanced analysis where certain offerings of digital assets through initial coin offerings might not be deemed securities offerings. This came after the SEC published the DAO report, but before the speech by William Hinman, Director of the SEC Division of Corporation Finance, in which he discussed the idea that a digital asset can become decentralized to the point of not being a security.

Most recently, Commissioner Peirce proposed a new safe harbor relating to the offering of digital assets that would facilitate achieving decentralization.  The proposed safe harbor would provide network developers with a three-year grace period within which they could facilitate participation in and the development of a functional or decentralized network that would be exempt from the registration provisions of the federal securities laws, so long as several conditions are met.  The proposal would exempt (1) the offer and sale of tokens from the provisions of the Securities Act of 1933, other than the antifraud provisions, (2) the tokens from registration under the Securities Exchange Act of 1934 (Exchange act), and (3) persons engaged in certain token transactions from the definitions of “exchange,” “broker,” and “dealer” under the Exchange Act.  While the proposal is unlikely to be adopted, it has opened a dialogue as to whether certain tokens offered for the development of a platform should be regulated in some manner other than under securities. 

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[1] Current SEC Commissioners

[2] The Howey test is a test created by the U.S. Supreme Court for determining whether certain transactions qualify as “investment contracts” under the Securities Act and the Exchange Act and are considered securities subject to certain disclosure and registration requirements.

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© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume X, Number 167
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Richard Levin Polsinelli Fintech Attorney
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Richard Levin is the Chair of Polsinelli’s Chambers rated FinTech and Regulation Practice.  He brings his experience as a senior legal and compliance officer on Wall Street and in London to bear in advising clients on corporate, securities and regulatory issues. A problem-solver by nature, his practice focuses on helping financial services and technology (FinTech) clients identify and address regulatory issues as they build their businesses.

The FinTech sector is...

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Stephen A. Rutenberg Shareholder Polsinelli New York Bankruptcy and Financial Restructuring Bankruptcy Litigation Capital Markets ,Commercial Lending ,Debt and Claims Trading, Financial Services, Insolvency, Financial Technology FinTech and Regulation
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Stephen Rutenberg’s practice focuses on the intersection of special situations investing and FinTech including cryptocurrency and blockchain technology. 

A significant component of Stephen’s practice relates to his work in the distressed debt market, representing clients in the purchase and sale of loans and securities of distressed and bankrupt companies. Recent representations include advising on the purchase, sale and financing of bankruptcy trade claims in several major chapter 11 cases, including Lehman Brothers, and the MF Global and Icelandic bank liquidations. He works with...

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Daniel L. McAvoy Shareholder Investment Funds Securities & Corporate Finance Mergers, Acquisitions and Divestitures Corporate and Transactional Joint Ventures and Strategic Alliances
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Dan McAvoy focuses his practice on private closed-end investment funds, corporate finance and M&A with a focus on private investment fund transactions, including complex GP-led restructurings and secondary transactions. Dan is a trusted adviser to numerous investment advisers, fund sponsors and investors, and has represented a range of companies, from startups to Fortune 500 companies. Dan has also represented portfolio companies and sponsors through all parts of the corporate life cycle, including formation, venture financings, add-ons, stock sales, asset sales, private and...

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