Disclaimer: what follows is my personal opinion and should not be construed as legal advice. If you are contemplating a token launch or securities transaction, it is imperative that you consult your own attorney.
I’ve previously written about debunking myths about security tokens. In that article, I showed how the SEC has given guidance that because tokens sold before an application or network is operational are examples of investment contracts, then sales of them must be compliant with securities laws in the US. That means that if you sell tokens to investors in the United States, or to Americans abroad, then you must follow the American securities laws.
This is very different from the wild and crazy world of ICOs that raised tens of millions of dollars in mere seconds in 2017. But just because everyone has to play by the rules now does not mean that it is impossible to sell tokens to Americans. In fact, the rules are fairly straightforward to follow, albeit expensive and time-consuming.
Since the passage of the Securities Act, it’s been left to the SEC and the courts to fill in the gaps about how to enforce the law. One of the most significant updates to the governing securities laws was the passage of the 2012 JOBS Act. Congress’s goal was to increase the accessibility of securities sales to regular Americans who weren’t already accredited.
A note on accreditation: The SEC has defined an accredited investor as someone who is an American or resides in the US who has either $1 million in assets not including their primary residence, or has earned $200,000 in income each of the last two years and expects to make the same this year. More on this at Investopedia.
The Securities Act of 1933 requires that sales of securities be registered with the SEC. You’re probably most familiar with this in the form of an Initial Public Offering (IPO), when a company lists its shares of stock for sale to the public. It’s a very lengthy process (taking 1–3 years to prepare for the financial auditing that is required as part of it) and costs an extreme amount of money (PwC estimates it costs at least $4.2 million). This route is really only taken by large companies, and IPOs have been decreasing in recent years.
Companies that wish to sell securities without doing an IPO may sell privately under an exemption provided to the Securities Act called Regulation D.
There are two rules that the SEC has clarified under which Regulation D can be used: 506(b) and 506(c). The basic parameters that are common to them are:
- No more than 2,000 individual investors
- You can raise an unlimited amount of money
- You must file Form D with the SEC (as well as state filings)
- Open only to accredited investors
The major difference between the two is that 506(c) allows for general solicitation. If you speak about your fundraising in an email newsletter, get quoted about your sale in article, or some other public notice, then you have bridged the gap to soliciting generally. Under 506(b), investors are allowed to self-certify to the company that they are accredited. But under 506(c), investors have to prove their accreditation to the company because the company is liable to the SEC if their investors are not accredited. In practice, this means that companies fundraising under 506(c) work with a vendor to do accreditation checks. In our case, Nori has partnered with CoinList to conduct our accreditation checks.
To recap: Nori is allowed to publicly solicit investors in our securities offering. If they are Americans or reside in the US, then they must be accredited. If they reside outside the US and are not American, then they don’t have to meet accreditation requirements. Nori can raise any amount of money, but we cannot sell tokens to more than 2,000 investors in this particular sale. We can set any minimum/maximum investment size that we want.
That covers the Regulation D sale that (for Americans, at least) requires accreditation. But it was also important to us that we make our offering available to non-accredited investors as well. Everyone should have the opportunity to buy early in the world’s first carbon removal marketplace for reversing climate change. To do that, we used another tool that came out of the 2012 JOBS Act: Regulation CF.
Regulation CF (CF for “crowdfund”) is an exemption that allows companies to sell tokens (or any security) to any investor over 18. There are government-enforced limits to the maximum amount that any one investor can make that are based on that person’s assets and income level. Any company offering a Regulation CF sale has to run the sale through one of the licensed platforms that the SEC has given the right to operate the sale. For this, Nori has partnered with Republic.
Prior to conducting a Regulation CF sale, the company has to file a Form C with the SEC. This is a lengthy document detailing everything possible about the business: who owns equity, who the managers are, the business plan, the risk factors for the investment, and terms of the sale. After this is published, the sale can begin on the public portal. While the sale is live, the SEC and FINRA have strict rules around communications from the company regarding the sale. Nori is not allowed to use language that is “marketing language” and terms of the sale in the same space as sharing the link to the campaign. Any questions investors have about the sale must be directed towards the campaign page so that all investors have the opportunity to see the information. It’s a much more onerous method relative to Reg D that isn’t very friendly to the startup, but we thought it was necessary to do in order to make NORI tokens as widely available as possible.
Ultimately Nori is running two different offerings that enable almost anyone in the world to buy securities that will convert to NORI tokens. You can read more details about how we are doing so in our white paper. It is not impossible to conduct a compliant token sale in the US, though it can take a long time to sort through the paperwork, and the legal bills are not insignificant.