Tokens were equated to securities

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Tokens were equated to securities

The authorities of the SEC, better known as the U.S. Security and Exchange Commission, as is well-known, recognized the initial public offering of the so-called tokens (or cryptocurrency, or ICO) as an equal, conventional offering of a company asset and business, stock. This commission isn’t the only authority internationally to recognize the fact of the information shown above.

This market regulator, among other things, released information regarding how market participants can evaluate the US laws that regulate operations relating to securities, on par with those related to cryptocurrencies. The new procedure stipulates that regardless of if the issuer is a decentralized, independent organization or a traditional finance company, as well as in situations when asset acquisitions are made in US dollars or cryptocurrency, all these exchanges are obliged to follow the same rules. Likewise, from this point forwards it does not make a difference if they are distributed traditionally or if they are distributed through the use of technology of the distribution registry.

The exchange distribution of cryptocurrencies these days is extremely vibrant. The excitement about them has by no means died down, on the contrary, it has only grown. Therefore, the exchange remains as it always has, namely, a segment of the financial market where you can both earn and lose allot.
Now, these companies that release assets based on blockchain will also be required to register their operations. Those who continue operating without registration will be held criminally liable for their actions by specialized authoritative bodies.
Among other things, the SEC requires those who wish to trade with this type of asset to register at the exchange.

As we all know, $43.9 million crypto “coins” created through blockchain were withdrawn due to an SEC investigative report following the conclusion of an audit of crypto-exchange operations by the DAO (Decentralized Autonomous Organization) project.

The DAO project attracted millions of dollars in the form of ethers, which has, in essence, the same algorithm as bitcoin. The so-called “ethers” are formed using the same blockchain technology. They are widely used on Ethereum’s platform, whose creator is without a doubt one of the most talented young programmers, Vitalik Buterin.

The DAO can practically be considered an exclusive algorithm for venture funds and it is used properly for attracting investment to cryptocurrency start-ups.

The management of these funds if completely automated, they run through a special computer program. All the finer points and principles of how it runs, down to the most common managerial tasks to every day “basic” financial operations and calculations of earnings, are clearly and consciously written into its computer code.
By the way, as recent as 2020 the DAO was hacked. In all, they made off with several million “ethers”, worth around $60 million dollars.

The same DAO collected $107 million dollars to invest in a special project on Ethereum dealing with a type of blockchain.

According to SEC data, despite the fact that the DAO considers itself to be a crowdfunded project, it does not adhere to even the basic requirements for crowdfunding. To start with, the authorities decided against pursuing punitive measures against the DAO, however, they have been official warning publicly relative to all financial exchange participants. According to Stephanie Avakian, the SEC Co-Director of the Division of Enforcement, these measures were absolutely necessary to safeguard the investors themselves, as well as the market as a whole.

Despite the fact that the SEC doesn’t lack legislative power, they heavily influence American exchange activity. Her statement, in turn, brought investors to the realization that they would be deprived of achieving a specific law regulating cryptocurrencies.

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The head of the Elina Sidorenko, the head of the interdepartmental working group focusing on concerns related to evaluating the return risks of “crypto coins” in the Russian State Duma. According to Ms. Sidorenko’s statement, the SEC has established new norms. The SEC only highlighted that they have the authority to decide if each of the existing ICOs has the right to issue this or that security and that they will resolve this on a case by case basis.

Ms. Sidorenko believes that, “the legalization of ICOs will cause the vast majority of prospective projects to fail, and the US, who decided upon a path to ICO legalization alone, has set a high bar to register legally, and it, in turn, will be taken into account by the State Duma’s working group.”

The US, having first recognized bitcoin as a payment method, gave LedgerX permission to offer cryptocurrency contracts.

According to Reuters, ICOs, or more accurately, their various investments, have become a literal “gold mine”, which has opened up new opportunities for participants to conduct an array of different operations with cryptocurrencies.

Participants received directly the incredible opportunity to quickly accrue millions through selling cryptocurrencies, while they remained under the authorities’ radar.
According to a report that cites Smith + Crown research data, already by summer 2020, tech firms raised about $1.1 billion in 89 ICOs, roughly ten times greater than that of the previous year.

Cryptocurrencies have established a fundamentally new method of attracting investment.

According to a statement made by Preston Byrne, a technology attorney for Reuters, “This is a shot across the bow for many of these ICOs”.
Russian authorities, intrigued by blockchain, are partly interested in the direction of growth in this sector on the financial market.

In particular, Mike Lobanov, General Partner at Target Global, who invested in the London crypto exchange CryptoFacilities, thinks that the SEC came to the right conclusion, saying that the current ICO market is the new “Wild West”. According to his opinion, at the moment ICO projects are created that attract massive investments, however, in all actuality they are worthless. The SEC can soundly argue that, regardless of if financiers consider the securities’ distribution process of ICOs or IPOs, the requirements for both will be completely equal.

In terms of what will happen to those who funnel funds into an ICO, the SEC makes clear to any US investors that it isn’t worth it to be tempted unless you want to run into legal problems with US authorities.

In Russia, the ICO exchange is not so pronounced.

In accordance with the laws of the Russian Federation, securities are recognized through legal documentation, which strictly adheres to the set requirements. This position isn’t without its supporters, who are convinced that cryptocurrency releases should be equated with the production or issuing of securities.
Those opposed are convinced that bitcoin shouldn’t mandatory rights and can’t be a financial obligation. Based on the assumption that cryptocurrency transactions are no better than bartering. Therefore, it makes no sense to regulate cryptocurrencies like securities, prior to enacting a law that makes blockchain shareholders just as legally liable as traditional shareholders.

The SEC report also “centralizes” the exchange, however, this will decimate nearly all the attraction of ICOs in the first place.

Lawmakers “hit the brakes”, aiming to protect masses of amateur investors. However, it is possible that the new legal norms will be developed further, making the legislative norms friendlier to investors as well as participants.

“General Risk Warning: Binary options and cryptocurrency trading carry a high level of risk and can result in the loss of all your funds.”

ICOs are Securities: Token Based Offerings Poised for a Rude Awakening as US Regulators May Soon Act

October 26, 2020 @ 11:10 pm By JD Alois

The US Securities and Exchange Commission (SEC) pumped their regulatory brakes on Initial Coin Offerings (ICOs) earlier this year. Pointing to the DAO debacle, the Feds said if a tokenized offering is a security it will be regulated, end of story. This statement was a long time in coming and was largely greeted as a pretty sensible approach. But this verbal shot across the bow caused the ICO industry to slow down for all of 30 seconds before ICOs powered back up, regrouped, and hit warp speed again. One attorney in the Fintech space described ICOs as crowdfunding on Cocaine, a reasonable analogy.

Much of the industry discussion has swirled around the nuances of the Howey Test – a series of questions to determine whether, or not, an investment is a security. Some ICO industry participants went to great pains to establish the fact their Token was a “Utility” Token and hence not a security and in no need of regulation. The Utility came from the hypothesis that its intended use was for a specific purpose. But at the same time many of these tokens were easily exchangeable for Bitcoin or other cryptocurrencies thus adding a twist to the token purchasing game.

Recently, the Commodity Futures Trading Commission (CFTC) published a Primer on cryptocurrencies and Blockchain technology. Buried within the primer was the statement that all virtual currencies are commodities and thus regulated by the CFTC. So when does a digital asset cross the line from being a token to become a regulated product? Good question.

Earlier this month, John Wright Gotts, who operates a web site titled “the Tokens & Exchange Self Regulating Body,” published a blog that addressed the question as to when a token is regulated and when it is not. The basis of the post followed a trip to the Securities and Exchange Commission in Washington, DC. The takeaway is that just about all ICOs are regulated. There are “Stokens” or security tokens, as Gotts calls them. And there are Tokens which are commodities or currency. The SEC gets to handle the securities version and the CFTC must monitor the commodity/currency variety. Only in very rare cases when an ICO involves a perimetered token that cannot be traded on an exchange will it not be regulated. In brief, just about every ICO in the US would fall under regulation and thus many have allegedly broken existing securities laws.

Crowdfund Insider reached out to crowdfunding guru Doug Ellenoff. A securities lawyer by trade, Ellenoff is a frequent visitor to the halls of the SEC where he is both respected and liked. His law firm, Ellenoff, Grossman & Schole (EGS), is probably the most prominent law firm in the investment crowdfunding sector having been a leader in the industry since it commenced. More recently, EGS has been active in the ICO sector. We asked Ellenoff to comment on Gotts’ opinion and here is what he said;

“We have spent the better part of the last year agonizing over these issues and wanting to disagree with this articles conclusion and desiring that a truly new form of capital raising has been identified for entrepreneurs,” said Ellenoff. “We have reviewed the applicable case law and published memos by law firms, spoken with numerous regulators, industry participants and professionals, attended a variety of crypto/blockchain and engineering conferences, lectures, read source materials, including books and white papers on the subject, and in the end [we] believe that there seems to be very little light to make a convincing argument that a token isn’t subject to existing regulatory oversight by the SEC, other Foreign regulatory authorities, State Securities Agencies or CFTC.”

In effect, if a US based ICO is not filing for a securities exemption, such as Reg D or Reg A+, it is in conflict with existing law and may expect a visit from the SEC Division of Enforcement at some point in the future. Ellenoff added that it is not impossible to do a Utility Token, but the real world experience is there are few of these or perhaps none at all.

“We aren’t saying that it is impossible to create a token that is unregulated but as you seriously analyze the “facts and circumstances” of many tokens in the market today, particularly in the context of policy considerations, and how they realistically function in the market (both on a primary issuance and secondary trading basis), even utility tokens, arguably have many equity-like characteristics (or are investment contracts),” shared Ellenoff.

Consequently, according to Ellenoff, the position that ICOs aren’t subject to regulatory regimes is simply wrong.

“[ICOs] seem to be too reliant on overly technical analysis of various components of the law without comprehensively recognizing the broad scope of these government agencies, the policy considerations involved and what is actually going on, what the funds are for and to whom these instruments are being sold—while we had hoped to make a contrary conclusion and have actively sought the counter argument, we accept that this is capital formation and investment, which has rules in place.”

Crowdfund Insider reached back out to Gotts for additional feedback and his criticism of ICOs was even more pointed. He believes the ICO market, in its current state, is largely a pump and dump scheme.

“This whole space is filled with vipers and criminals. My work with the SEC is to uncover and prosecute the biggest pump and dumps in space,” said Gotts.

Gotts believes that some ICOs are allowing early investors, or “whales” to swoop in at a discount, purchase tokens and then dump them during the public sale. That’s not good. In fact, that would be illegal in many countries, including the US. We have heard industry rumors that concur with Gotts’ assessment.

A prime target of Gotts is Bancor. He calls it the “poster child for illegal ICOs”. Not too long ago, Bancor raised a whopping $153 million that raised more than a few eyebrows. A few months following the Bancor ICO, the token valuation is pegged at just $78 million on CoinmarketCap.

“If Bancor raised $153 million, why is its coin only worth $78 million? How is it not trading for cash on hand?” asks Gotts.

That is a good question for investors to ask the Bancor founders.

[clickToTweet tweet=”“If Bancor raised $153 million, why is its coin only worth $78 million?’ #ICO” quote=”“If Bancor raised $153 million, why is its coin only worth $78 million?’ #ICO”]

The most recent ICO melodrama is the Tezos fiasco. Following a crowd sale that raised $232 million (with some estimates placing the total haul at $400 million following the rapid rise in crypto values) the Tezos team devolved into virtual fisticuffs. The very public bickering has placed the entire project in question with one law firm investigating the offering for possible securities fraud. And think about the valuation necessary to justify such a sizable raise.

Tezos benefitted in part from the high profile participation of VC Tim Draper who invested in the company. It was reported that Draper received a solid pre-ICO discount. Remember, Tezos is still pretty much a concept; a white paper and a vision.

Cointelegraph recently wrote a scathing article asking if Draper may have been “cheating” questioning whether or not he was in for the long haul. A sensible question to ask.

Some industry insiders predict the Feds will make an example of an ICO before the end of the year. But regulators are sensitive to the optics surrounding innovation so they are proceeding with caution. There is also a question as to whether or not they will go after a high profile ICO (and the money to fight back) or gun for a smaller target.

While too many questions surround the ICO market and there are plenty of opinions on either side, Gotts, for one, sees a viable industry emerging from whatever happens going forward. As long as issuers follow the rules, ICOs can and will work. But for now he prefers caution leaving one to wonder when, not if, the SEC will address the elephant in the room of a company selling securities but not filing the appropriate securities exemptions. Simultaneously, will the Feds be digging into the chatter of these alleged pump and dump schemes?

“The SEC and CFTC have a maniacal focus to protect investors,” explains Gotts. “Of course, they are interested.”

The Official Guide To Tokenized Securities

Security Token Offerings will revolutionize the traditional finance world.

Every new technology breakthrough allows entrepreneurs to either build new things or improve old things. One of the most important technology advancements in recent history is blockchain — officially defined as a digital ledger where transactions made in bitcoin or another cryptocurrency are recorded chronologically and publicly.

Blockchain has allowed for the creation of cryptocurrencies or “tokens” (which they will be called throughout this piece). According to the Swiss regulatory body FINMA, tokens can have three functions: Payment Tokens, Utility Tokens, or Asset Tokens (Security Tokens).

Payment Tokens are used as a means of currency or payment and Utility Tokens are intended to provide digital access to an application or service. While those are both interesting, this guide will serve to explain Security Tokens, the regulation that governs them, along with the advantages & disadvantages they bring. This is intended to be a living document that will be updated from time to time with new resources, regulatory rulings, and other pertinent information.

What is a Security Token?

Security Tokens are digital assets subject to federal security regulations. In layman terms, they are the intersection of digital assets (tokens) with traditional financial products — a new technology improving old things.

If cryptocurrencies like Bitcoin are considered “programmable money” then you can consider Security Tokens a version of “programmable ownership.” This means that any asset with ownership can and will be tokenized (public & private equities, debt, real estate, etc).

Why are Security Tokens Important?

Security Tokens bring a number of improvements to traditional financial products by removing the middleman from investment transactions (usually some form of a banker). The removal of middlemen leads to lower fees, faster deal execution, free market exposure, larger potential investor base, automated service functions, and lack of financial institution manipulation.

Lower Fees — Many fees associated with financial transactions are derived from payments owed to middlemen (bankers, etc). Security Tokens remove the need for most bankers which reduces fees, and smart contracts may one day decrease the reliance on lawyers as well. These smart contracts will reduce the complexity, costs and paperwork with managing securities (collecting signatures, wiring of funds, mailing of distribution checks, collection of W-2s, Sending K-9s, etc).

Faster deal execution — The more people involved in a deal, the longer it usually takes to execute. When Security Tokens remove middlemen from investment transactions, they enable accelerated timelines for issuers to successfully offer their security. Additionally, immediate trade settlement on the secondary market for Security Tokens will become an attractive advantage for issuers & investors too.

Free market exposure — Most investment transactions today lack exposure to a global investor base. For example, it is hard for investors in Asia to invest in private US companies or real estate. With Security Tokens, asset owners simply market their deals to anyone with an internet connection (within regulatory limits). This free market exposure should lead to a significant change in asset valuations since any asset that is not exposed to a free market is mispriced.

Larger investor base — When asset owners can present deals to anyone with an internet connection, the potential investor base is drastically increased. For example, would you rather show your investment opportunity to only US accredited investors & institutions or every potential investor in the world? Competition is healthy and a long-term net good for financial markets.

Automated service functions — Lawyers are less middlemen and more service providers in most transactions. With Security Tokens, issuers will begin to use smart contracts to automate the service provider function through software. This doesn’t mean that lawyers will disappear, but rather that their role will be more advisory based.

Lack of financial institution manipulation — This is a complex topic that is sure to be controversial. The short explanation is the likelihood for corruption and manipulation by financial institutions is decreased if those institutions are removed from the investment transaction process.

Are Security Tokens legally compliant?

If you take away one thing from this guide, remember this: When Security Tokens are done correctly, they don’t skirt laws & regulations, they remove financial institutions and middlemen.

This is because Security Tokens are subject to federal securities regulations — they are compliant from day one. There are three regulations in the Securities Act of 1933 that every person should be aware of when looking at US-based Security Tokens: Regulation D, Regulation A+, and Regulation S.

Regulation D — This allows an offering to avoid being registered with the SEC, but requires an electronic filing of “Form D” after the securities have first been sold. The individuals offering the security may generally solicit investors for an offering that meets the requirements of Section 506c, which requires verification that the investors are accredited and the information provided during the solicitation must be “free from false or misleading statements.” In most cases, investors who purchase a Regulation D offering may not sell their ownership stake for at least 12 months after their initial purchase.

Regulation A+ — This exemption allows an issuer to offer a security qualified with the SEC to non-accredited investors through general solicitation for up to a total of $50,000,000 in investment. Due to the requirement to register the security, Regulation A+ issuance can take longer compared to other options. Regulation A offerings require qualification of a Form 1-A offering circular, including audited financials. Due to the requirement to qualify the security and complete an audit, Regulation A+ issuance can cost more and take longer compared to other options. Regulation A+ offerings treat all money raised as revenue and tax it as such if the money doesn’t represent equity in the underlying company.

Regulation S — This is when an offering of securities is deemed to be executed in a country other than the US and therefore not subjected to the registration requirement under section 5 of the 1933 Act. Issuers of the security are still required to abide by the security regulations in each country where they offer their security.

Disclaimer: The above summaries of US securities law, including Regulations A+, D, and S, are merely my personal opinion. They should not be construed as legal or investment advice and you should consult a lawyer for any and all questions you have.

What are the disadvantages of Security Tokens?

The removal of financial institutions from investment transactions is generally seen as advantageous by the crypto community but there are also a number of disadvantages & risks associated with it. When you remove middlemen, you have to shift the middleman’s responsibilities onto the buyer or seller in the transaction.

Normally financial institutions serve a few functions: underwriting a deal, preparing marketing materials, soliciting investor interest, ensuring high levels of security & regulation compliance, and ultimately driving a successful execution of the transaction.

Security Token Offerings (STO) will require the issuer to underwrite their own deal via third party audits, prepare marketing materials, generally solicit investor interest, and have high confidence in their security & regulatory compliance. Many traditional investors believe that a large percentage of potential issuers are incapable of successfully executing these functions without traditional financial institutions. Time will tell who is right.

Where can I learn more about Security Tokens?

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