How to Navigate & Understand Evolving Cryptocurrency Regulations and Their Impact for Blockchain Entrepreneurs, ICOs & Crypto Investors
A Q&A with the Experts from Paul Hastings
In our March 27 Boston Crypto Meetup, we talked about how ICOs raised over $4 billion in the last year alone, and have attracted lots of regulator attention in Washington. The SEC, CFTC, Treasury, Homeland Security and Congress are all involved, but who is really in control, and what are their goals? And, how will this impact entrepreneurs looking to raise funds for their startups with using the initial coin offering?
As a follow up to our panel, Dina Ellis Rochkind (Of Counsel in the Paul Hastings Government Affairs practice in Washington, DC) and Nick Morgan (Partner in the Investigations and White Collar Defense practice at Paul Hastings in Los Angeles) have also offered their insights in the following Q&A in an effort to help the community make sense of the various interdepartmental relationships and regulators’ ambitions, who is winning various tug-of-war contests and how this will overall impact the future of blockchain business in the US.
As Dina and Nick shared in a presentation from the event, many regulatory leaders as well as members of US Congress are focused on the risks of investor fraud and money laundering. Others have shown concern in the ramifications of quashing a nascent industry with potential to raise capital, and may consider large SEC enforcement actions as an overreaction by Congress and regulatory overreach that could hinder the creation of US-based economic opportunities in what is an ever-growing global initiative.
Here are Dina and Nick’s insights on how this impacts entrepreneurs looking to get started in 2018:
1) What are the top things US-based blockchain entrepreneurs looking to fundraise with an ICO need to consider before even getting started?
Nick: Whether, in fact, a business case can be made for fundraising with an ICO. Too often we see offerings in which a “coin” is added for atmospherics rather than to add value.
Dina: Is there a good business case for doing an ICO — where the law is uncertain — rather than just doing a private placement.
2) In your opinion, what are the biggest risks for entrepreneurs in how they invest time and resources to launch a project or company and how yet-to-be determined regulations could negate those efforts?
Nick: A huge risk is not understanding your tolerance for regulatory risk in the first place. If your business model is “move fast, disrupt, scale up, and deal with regulatory consequences later,” but in fact your regulatory risk outlook is better described as “move deliberately, ask for permission in advance, avoid regulatory confrontation,” that disconnect may come to haunt you. Many actors in the blockchain space may think they are willing to throw regulatory caution to the wind. Until they receive a subpoena. Knowing your own regulatory risk tolerance in an uncertain, evolving landscape will go a long way toward avoiding disappointment and frustration in the event you encounter a regulator who doesn’t share your entrepreneurial enthusiasm.
Dina: I am not an entrepreneur but talk with many. The biggest thing that always concerns me is if the business is incomprehensible or keeps changing throughout the discussion. As lawyers, it is not our job to judge the business but it becomes harder to give good advice if the goal keeps shifting.
3) How can entrepreneurs employ a few evergreen best practices in how they approach an ICO or crowd sale to cover as many bases as possible?
Nick: Disclose, disclose, disclose. Accurately, of course. Whether conducted through a registered or exempt offering, anything short of a full-blown S-1 IPO may suffer from regulatory skepticism because of the greatly reduced amount of disclosure to investors. A white paper describing a business model or technical description may not contain nearly enough information for investors — at least in the minds of regulators.
Dina: Again, I wholeheartedly agree with Nick on being upfront on disclosure so you can avoid an SEC investigation or enforcement action or the state securities regulators. Nick is an expert on how not to get in trouble or what to do if you are being investigated.
4) How can blockchain entrepreneurs best participate in the creation of regulations — do you recommend community mobilization or reaching out directly to lawmakers to present the pros vs. cons of some pending regulations?
Nick: Regulators are seeking out input on blockchain and ICO issues, but proper channels are the key to success. Proposed regulations have a public comment period, and it is possible in certain circumstances to communicate directly with SEC staff to provide input. (Hint from Nick: call Dina).
Dina: Nick — thanks for the shout out! I am a believer that there is a disconnect between entrepreneurs interested in doing ICOs and Washington DC. For smaller companies/start-ups, I recommend forming a coalition, developing a set or asks, and hiring someone who has the connections and substantive knowledge to navigate Capitol Hill, SEC and potentially other agencies like the CFTC or Treasury. A government affairs expert can help you have discussions with the senior leadership of the various agencies and Congress.
I’d like to express sincere thanks to Dina and Nick for their time spent with our Boston Crypto Meetup group, and for providing additional answers here for those blockchain entrepreneurs who couldn’t attend in person. Additional information about Dina and Nick can be found below.
About the Experts:
Dina Ellis Rochkind is Of Counsel in the Paul Hastings Government Affairs practice and is based in the firm’s Washington, D.C. office. Her practice focuses on representing clients before Members of Congress on Capitol Hill and the Executive Branch. Ms. Rochkind represents clients in matters involving regulatory initiatives, policymaking and legislation, and enforcement actions.
Nick Morgan, Partner in the Investigations and White Collar Defense practice at Paul Hastings. He focuses his practice on complex securities litigation in state and federal courts and representations involving government investigations and white-collar crime allegations levied against individuals and businesses. In the course of his practice, he routinely represents securities issuers, company officers and directors, investment funds, analysts, and brokers in connection with SEC and Financial Industry Regulatory Authority (FINRA) investigations, litigation, and arbitration. Mr. Morgan also counsels public companies, funds, and broker-dealers on securities compliance and corporate governance; conducts internal investigations; and assists in regulatory examinations initiated by the SEC’s Division of Corporate Finance and Office of Compliance Inspections and Examinations. Mr. Morgan also previously served as Senior Trial Counsel in the SEC’s Enforcement Division. Nick has been numerously quoted in Coindesk, CNBC and other publications.
Disclaimer: The information contained in this article may not reflect current legal developments and is general in nature. It should not be relied upon or construed as legal advice, and it is not a substitute for obtaining legal advice about a specific question from an attorney licensed in your state.