Over the last two weeks, the U.S. Securities and Exchange Commission (SEC) has released a number of pivotal orders regarding the world of blockchain from an exchange in EtherDelta to unregistered security offerings with both CarrierEQ, Inc. (aka AirFox) and Paragon Coin, Inc. These decisions have been poured over and analyzed by a nearly one hundred securities professionals and amateur securities professionals trying to decipher the true meaning of these orders. These are not the plan guidelines that we were promised, at least not yet, but I do believe there is significantly more enforcement actions and additional guidelines to come. In the meantime, here is the TLDR (Too Long Didn’t Read) for the companies, entrepreneurs and other folks in this space that want to stay out of the SEC’s crosshairs. (Links to the decisions are down below).
- The SEC is not your friend but it is not necessarily your enemy. This is a simple yet complicated idea that a lot of people in the crypto community have yet to grasp. The SEC does not want to hurt innovation in so much that it doesn’t want someone’s nana, grandma, or babushka being taken advantage of. The SEC has not hit any of the aforementioned companies with millions of dollars in fines or even barred them. In fact, some would say they have basically received a slap on the wrist and have been told to clean up their act or, presumably, we (the SEC) will be back. If you know you’ve violated the law or think you have violated the law, contact a securities attorney immediately. Federal level rescission offers are now kosher in crypto. Get them while they last or before the fines start rising.
- Stop being an unregistered broker-dealer. Just stop. I know this is a shock to most people in this space, but if I facilitate a trade between two people and take a commission of that deal, I am, for all intents and purposes, a broker. This profession is highly regulated; ask anyone registered with Financial Industry Regulatory Authority (FINRA) if this is a transaction they would like to conduct unregulated. And please, do not get me started on the number of over the counter (OTC) and exchange related problems, including anti-money laundering, know your customer, and Financial Crimes Enforcement Network (FinCen) related issues with these transactions. If you are regularly transacting in the OTC space without being registered or operating under a narrow exception or exemption, you will be the next in line for enforcement actions.
- No, your naming skills aren’t fooling anyone. Marketing is a hot button that has yet to be punched thoroughly by the SEC. However, in all of the above mentioned actions, nearly everyone is using the utterly bullshit excuse “we didn’t market ourselves as an (insert appropriate term: securities, exchange, broker-dealer, etc.).” This is why everything, from shady terms to creating a new acronym; to using “it’s not an Initial Coin Offering (ICO), it’s a “Regulated Tokenized Securities Issuance by the SEC;” to using technology to match buyers and sellers, is all going to go through the same damn legal analysis laid out in the Securities Act, Exchange Act, Investment Act and/or Advisor Act. Stop trying to create exceptions to the law by using a new word or made up series of words. This does not fool anyone, especially the SEC.
Last but not least, there are exceptions and exemptions to nearly every law on the books. We have these because, well, the law is imperfect like us humans. If you think you are one of these exceptions/exemptions or if you believe you’re not, please seek assistance from a professional in this space. These cases are only going to continue (my prediction is over the next six to eight months we will see more) but that does not mean you or your company has to be one of them. Be smart, be safe, and do not screw over your investors.
CarrierEQ, Inc./AirFox: https://www.sec.gov/litigation/admin/2018/33-10575.pdf
Paragon Coin, Inc.: https://www.sec.gov/litigation/admin/2018/33-10574.pdf
TokenLot, LLC: https://www.sec.gov/litigation/admin/2018/33-10543.pdf
Crypto Asset Management, LP: https://www.sec.gov/litigation/admin/2018/33-10544.pdf
This article is provided as a general informational service to clients and friends of Jonathan C. Dunsmoor, Esq. and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes. For inquiries regarding this matter or others please contact us at Info@DunsmoorLaw.com or 716-371-1936.