Douglas Park on Regulations and Lessons from Advising Crypto Startups
What Were You Doing Before Blockchain?
I’m a corporate securities attorney currently focusing on crypto and blockchain issues. I taught business, tech and organizational behavior at a university in Hong Kong, as well as at Stanford University in Silicon Valley. When I’m working with entrepreneurs and advising clients, I always try to integrate business and law in light of my experience in corporate transactions, M&As, strategy execution, etc. It’s particularly important in the crypto and blockchain world.
How Are You Actively Advising Blockchain Clients?
We advise on a number of areas, including various forms of token sales, airdrops, security tokens, utility tokens. We advise clients on how to get listed on exchanges. That could involve writing legal opinions or memos. We’ve also represented clients who’ve been investigated by the SEC and/or state regulators. We also advise digital exchanges, as well as corporations who are exploring the benefits of blockchain, either tokenizing real assets or implementing a blockchain component.
What Are Some Risks or Challenges That Your Clients Face?
There are a host of issues depending on their strategy, which could affect the kind of licenses or approvals they need to run a business or platform. For instance, some companies want to issue security tokens on the blockchain. Their advisory firms are wondering whether they need to be registered as a broker-dealer under current rules.
How Do You Deal With Questions Around Utility Token vs. Security Token? Does That Regulatory Hurdle Impact Businesses?
It’s not clear that a security can turn into a utility token. An SEC official suggested in his remarks that Ethereum (Ether) was a security but now is a utility token. But where’s the legal basis in terms of formal guidance? The vast majority of the tokens launched to date would probably not meet the criteria to not be considered a security, as suggested by the SEC official.
Also, remember folks are scrutinizing things coming out of the SEC to get guidance and clarity. But those remarks reflect his personal opinion, not necessarily formal guidance of the SEC. It’s a complicated legal issue. With clients, I try to avoid the hype and noise, so I can walk through the legal analysis of reducing their risks.
What Kind of Effect Does This Have on Startups Wanting to do Token Sales?
Clients often ask: how do they reduce the legal risks of a token sale. They even consider launching their business in other countries toavoid that risk. Many clients consider Singapore, Switzerland, Cayman Islands, Malta, among others. Some of those countries have token sale-specific regulations or just more legal clarity than the U.S.
The SEC is most concerned with taking actions against fraud and egregious behavior. Of the enforcement actions the SEC has taken against companies that launched token sales, almost all of them involves securities fraud. During the marketing and promotion of the token sale, the companies misrepresented or ‘flat out lied’ about their business. One company claimed to have partnerships with many banks. The SEC forced this company to return the funds to investors, and worked with the Department of Justice to bring criminal charges.
What Kind of Things Can Happen to Companies Who Are Non-Compliant in This Changing Landscape?
They’re not likely to face criminal liability, assuming they’re not misrepresenting or flat out lying to investors. But yes, there could be instances where they acted in good faith but fail to comply with current securities laws. They could be subject to a financial penalty, or have to return funds to investors, or must do other things to redress issues with regulators and investors. But it’s the SEC that calls upon the Department of Justice to take criminal charges against fraudsters.
How Do You Help Blockchain Startups to Increase Their Chances of Success?
As part of the vetting process, we ask companies why are they using blockchain? What is the benefit to the users of their product or service in having a blockchain component? How does this component help with their revenue stream? How does affect their company’s operations and strategy? In the earlier hype cycle, we saw companies proposal a blockchain component without seriously thinking through those questions. But now we think entrepreneurs are using it as a integral part of their business strategy and competitiveness. If they do that due diligence, they can get ahead.
What’s the Outlook on Regulations and the Crypto Landscape?
I believe there’s a high probability that token security exchanges will emerge as an alternative to current digital exchanges that primarily list non-security tokens (i.e. utility tokens).
There are benefits to issuing security tokens over traditional equity. Security tokens offer investors direct economic benefits, such as dividends or revenue share, on top of liquidity. But the major barrier has been liquidity. It’s hard to trade securities tokens. So by the end of 2018 or early 2019, when exchanges allow security tokens to be traded, this could really change the landscape.
Hosted by: Jeff Peterson, Alain León
Show Writer: Dang Du