Crypto Fundraising and the SEC
ICO vs IEO vs STO vs Private Sale
The SEC has been hot on the heels of many cryptocurrency projects over the last 24 months. Regardless of the reputation or the size, the SEC sees none as immune to regulations including EOS with their $4 Billion ICO, and Sia which was created over 4 years ago. Some people hold the view that the SEC are out to quash any successes within the industry, while others welcome the scrutiny and encourage some degree of regulation.
The overwhelming question remains — if there are any safe approaches to fundraising when it comes to crypto.
Crypto Vs. the State
SEC v. Veritaseum
The U.S. SEC filed a complaint against Reginald Middleton, Veritaseum Inc. and Veritaseum LLC in relation to a fraudulent and unregistered initial coin offering (ICO). Of the $14.8 million raised, $8 million has recently been frozen by the U.S. Eastern District Court of New York.
SEC v. ICOBox
The U.S. SEC filed a complaint against ICOBox in relation to an unregistered ICO. In addition to the $14.6 million raised, the complaint expands to accuse the company of brokering over $650 million raised in other ICOs.
SEC v. Centra Tech Inc.
The U.S. SEC filed a complaint against Centra Tech, Inc. in relation to a fraudulent and unregistered ICO, raising $32 million.
SEC v. PlexCorps
The U.S. SEC filed charges against Dominic Lacroix and Plexcorps in relation to a fraudulent and unregistered ICO that raised up to $15 million.
SEC v. Argyle Coin, LLC
The U.S. SEC halted and froze the assets of Jose Angel Aman and Argyle Coin, LLC in relation to an ICO Ponzi scheme, raising $30 million.
SEC v. REcoin Group Foundation & Diamond
The U.S. SEC filed a complaint against Maksim Zaslavskiy, REcoin Group Foundation and Diamond Reserve Club in relation to a fraudulent and unregistered ICO, raising $300,000.
SEC v. Blockvest LLC
The U.S. SEC filed a complaint against Reginald Buddy Ringgold, III aka Rasool Abdul Rahim El and Blockvest LLC in relation to a fraudulent and unregistered ICO. The SEC lost a motion to freeze Blockvest assets as they could not prove the ICO was an unregistered securities offering.
SEC v. Titanium Blockchain Infrastructure Service Inc.
The U.S. SEC filed a complaint against Michael Stollaire and Titanium in relation to a fraudulent ICO, raising $21 million.
SEC v. AriseBank
The U.S. SEC filed a complaint against Jared Rice Sr., Stanley Ford and AriseBank in relation to a fraudulent and unregistered ICO, raising $600 million.
SEC v. Block.one
The SEC filed a complaint against Block.one, the company behind EOS, in relation to an unregistered ICO, raising $4 billion. This case was settled out of court with a penalty of $24 million paid by Block.one.
SEC v. Nebulous
The U.S. SEC filed a complaint against Nebulous, the company behind Sia, in relation to an unregistered ICO, raising $120,000. This case was settled out of court with a penalty of $225,000 paid by Nebulous.
SEC v. Kik
The U.S. SEC filed a complaint against Kik, in relation to an unregistered ICO, raising $100 million. Kik has closed down the company in order to continue fighting against the SEC.
ICO is Short for ‘Going to Jail’
The above are only a handful of cases brought forth by the SEC, but as seen, many of the cases are in relation to actual fraud charges in addition to unregistered ICOs. In addition to this, a motion by the SEC in one such case was denied by court as they couldn’t prove the ICO passed the Howey test and was a securities offering.
It is easy to mistake all this legal action as a vendetta by the SEC since the most prominent cases, being EOS’s Block.one, Siacoin’s Nebulous and Kin’s Kik, are not in relation to fraud at all and have strong support from many in the crypto community. It is easy to believe these are what all cases appear like, but these are a very small portion of the majority of cases.
The SEC, although a prominent voice worldwide and continue to make headlines globally, only have authority within the U.S. Any ICO conducted to investors outside the U.S. are completely immune from litigation by the SEC. This is something many don’t understand in relation to the Block.one settlement. Although they raised $4 billion, the settlement was only $24 million, which is only 0.6% of the total amount raised. This seems like a pretty good sellout for Block.one and a poor decision by the SEC. However, of the $4 billion raised, only a small portion was received from U.S. investors, and it is this small portion that the SEC has the ability to pursue legal action against.
Another point to note is that ICOs are not the only fundraising approach blockchain companies have followed, but they appear to be the only method which has attracted strong attention from the SEC.
Hundreds of millions have been raised in the sale of cryptocurrency tokens that were not involved in ICOs. These have fallen under Private Sales and Initial Exchange Offerings (IEO).
Private Sales are essentially regulated ICOs, offered to an exclusive list of individuals and companies. Generally speaking, these investors will all be accredited and although this doesn’t automatically mean these fundraising methods are safe from any litigation, it makes it much harder to fall outside the law and for the SEC to make a case against the project.
Conducting a private sale also allows projects to file for a Securities Act exemption as outlined by the SEC. This is one of the safest routes as it is essentially a stamp from the SEC that they will not pursue any litigation or investigate the fundraising as an unregistered security offering.
In relation to future success, a private sale is also often the start of ongoing partnerships and close relationships with large investors and companies who can implement, use or improve a project’s products or applications.
Many companies saw the flaws in the 2017 ICO race, and instead took the private sale approach to ensure the legality of fundraising methods. As seen in the Kik case, regardless of the size or reputation of the organisation, a legal battle of the fundraising approach can and will cost dearly, even resulting in the collapse of the company, win or lose.
Aelf was one such company, raising almost $25 million in funds through a private sale to a select number of accredited investors that was filed for exemption of the Securities Act. A challenge with this approach is the ability to spread a projects token and awareness throughout the community. This was tackled by aelf in the form of a bounty system, similar to an airdrop. Marco Santori, president and CLO at Blockchain explained that these approaches are also immune from SEC scrutiny as they do not require an initial investment from the token receivers:
“According to the court, in the ICO context there must be a “risk of financial loss”. This supports the proposition that something like an airdrop, by itself, cannot be a securities offering, even if the airdropped tokens are pre-functional.”
Through this method, aelf was able to register over 1 million users throughout 221 countries creating an incredibly wide project awareness.
Initial Exchange Offering
A recent approach that has also seen millions raised by multiple projects globally, comes in the form of an Initial Exchange Offering (IEO). The approach is almost identical to an ICO, except that the sale occurs on a specified exchange platform. This essentially transfers the legal responsibility from the project raising the funds to the exchange that hosts the offering. The exchange essentially becomes a broker for the fundraising and must register as such, according to SEC senior advisor, Valerie Szczepanik . Exchanges such as Binance, OKEx, Bittrex and Kucoin all have conducted such offerings already but we are yet to see how strongly the SEC will pursue this approach.
This approach should seem less risky as it is easier for an exchange to complete legal requirements if they offer multiple IEOs offer time, rather than each individual project doing their own research, filing and legal work. It also is attractive for projects not only with the reduced legal costs and time requirements, but also with the reduced risk as most of it is worn by the hosting exchange platform.
SEC Working with Projects
It is easy to see the SEC as the bad guy in the situation and there are many strong cases that they haven’t held up their end of the bargain with poor clarity of regulations surrounding cryptocurrencies and token sales. But there is also evidence that they are not fully against cryptocurrencies as shown in the regulated token offering cleared by them.
In July, 2019 the SEC cleared Blockstack to conduct a $28 million offering under Regulation A+, an alternative to an initial public offering (IPO) meant to help fledgling businesses raise capital. Although this is a first of its kind and seen as a good move for Blockstack, it was also a costly one with approximately $500 thousand spent on lawyers to obtain the approval.
Later that month, the SEC also cleared gaming company, Pocketful of Quarters, to issue its tokens without registration as a security.
Security Token Offerings & Lack of Regulation
Around 40 broker-dealer applications are currently sitting with FINRA, which, once approved, would allow these firms offer securities in the U.S. These are essentially the registered form of the ICO, classing the tokens as securities. These startups have been waiting for up to 14 months causing understandable frustrations from many of the startups. A strong view from many believe that FINRA are holding off on approvals due to the lack of clarity offered by the SEC.
Others believe this to be a natural course due to the new and unprecedented nature of cryptocurrencies, stating that the SEC has been actively engaged with the industry, seeking input surrounding many of these issues.
Regardless of the reasons, many of these projects are tempted to follow other examples who have completely removed access for U.S. investors to partake in any fundraising.
It could be said that good or bad, the SEC has achieved a degree of success in relation to what they stand for. They have reduced the amount of scams and fraud in the industry and have held many accountable for illegal actions that resulted in losses for thousands of investors.
What is also important is the fact that there are still methods that are safe for companies to conduct fundraising to a degree. There is still a desperate need for more clarity regarding cryptocurrency regulation as shown by the ongoing battle between the SEC and Kik, but many other countries have advanced their regulations to provide the required clarity many projects need to function successfully.
· aelf Twitter
· aelf Facebook
· aelf YouTube
· aelf Instagram
· aelf Reddit
· aelf Medium (for the latest update and articles)
· aelf Github (complete aelf project codes)
For more information, visit aelf.io