Subpoenas are generally issued as an evidence gathering tool with the intention to prosecute if wrongdoing is established. On Wednesday, the Wall Street Journal(paywalled) reported that the SEC had issued scores of subpoenas against companies that had filed initial coin offerings. No specifics were provided however, leaving commenters to speculate on the scope and target of the offensive. In such scenarios, it is common for a single company to receive multiple subpoenas, so it is unlikely that the SEC has taken on the entire ICO landscape.
With the SEC yet to comment on the matter, speculation has mounted. The regulatory agency’s position on initial coin offerings, as voiced by its chairman Jay Clayton, is well documented. At the recent Senate hearing on cryptocurrencies, he stated that the agency’s Division of Enforcement would “continue to police these markets vigorously and recommend enforcement actions against those who conduct ICOs…in violation of the federal securities laws”.
As U.S. investors will attest, trying to find a crowdsale that will accept their contribution is nigh impossible now. The free and easy days of summer 2017, when anyone, anywhere could swap their ether for the hottest new tokens from the coolest new crowdsale seem like a distant memory. Startups that have diligently refused to accept funds from U.S. investors should have nothing to fear, but excluding this major and monied demographic isn’t an ideal solution. Moreover, U.S.-based ICOs desire the freedom to launch in their native country without fear of being shut down should the SEC decide their utility token is actually a security.
Instead of keeping a low profile and praying the SEC doesn’t come calling, some startups have been beating a path straight to their door, seeking their tacit approval. There are three types of federal securities permissions that ICOs – or indeed any company seeking to trade a security – can apply for: Regulation D, Regulation S, and Regulation A+. Regulation S is only applicable when the security is offered in a country outside of the U.S., but the other two – D and A+ – offer a possible route to compliance.
Knowbella Tech, an open science project, has gone for the A+ option, but its CEO, Mark Pohlkamp concedes that it is entering uncharted waters. “Regulation A+ is similar to a pre-sale or perk crowdfunding campaign offered on platforms like Kickstarter or Indiegogo, but also allows us to offer participants equity in our company in the form of Helix tokens, similar to cryptocurrencies,” he said. Sovereign, a philanthropic cryptocurrency targeted at Fortune 500 companies, is also considering going down this route.
Regulation A+ isn’t without its problems though. For one thing, issuers are limited to raising $50 million in a 12-month period, although this solution does at least negate the need for investors to be accredited by the SEC. The alternative, Regulation D, allows the issuer to avoid being registered with the SEC, but investors must be accredited and may not sell their stake for 12 months afterwards. According to attorneys Pepper Hamilton LLP, “Since the beginning of 2018, four companies have filed Form 1-As with the SEC seeking to utilize Regulation A+ to raise funding and go public.”
The costs of obtaining regulatory approval for an initial coin offering aren’t cheap. But compared to the cost of having to cancel a crowdsale, return contributions to investors, and seek legal defense counsel after being prosecuted by the SEC, the next crop of ICOs may have little choice but to cough up and comply.