Biz Builder Mike

You can't sail Today's boat on Yesterdays wind - Michael Noel

SEC Commissioner Hester Peirce Comes to the Defense of Unikrn and ICO Settlement

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Earlier today, the Securities and Exchange Commission (SEC) announced a settlement with Unikrn, a digital asset issuer that was deemed to have transgressed securities law in the offering of an unregistered security via an initial coin offering (ICO). Unikrn agreed to pay a $6.1 million penalty while effectively shutting down operations and retiring issued tokens. Unikrn settled without admitting or denying the SEC’s findings.

In the aftermath of the announcement, SEC Commissioner Hester Peirce, a well-known proponent of Fintech innovation, criticized the SECs decision to pursue such a settlement without any allegations of fraud. Commissioner Peirce pointed to the destruction of the company as the outcome of the settlement, stating:

“… the Commission is effectively forcing the company to cease operations because of an allegedly improper offering of supposed securities.”

While recognizing the transgression, Commissioner Peirce warned the SEC was stifling innovation and accompanying  economic growth with its heavy-handed approach to the emerging area of digital assets.

Commissioner Peirce has proposed a regulatory “safe harbor” for digital assets in a move to allow more clarity in the offering of digital assets.

Commissioner Peirce’s Statement is republished below.

Today’s settlement with Unikrn, Inc., is the latest in a growing line of enforcement actions arising from initial coin offerings.[1] While many SEC enforcement actions in this space include allegations of fraud, Unikrn falls within the narrower category of token issuers charged only with violating Section 5 of the Securities Act.[2] In other words, Unikrn is alleged to have offered and sold its tokens in an unregistered offering and in a manner that did not qualify for an exemption; it is not alleged to have engaged in any fraud in doing so. Registration violations, even standing alone, are serious, and our enforcement actions can serve to deter such violations and protect harmed investors. We should strive to avoid enforcement actions and sanctions, however, that enervate innovation and stifle the economic growth that innovation brings. I believe that this action and its accompanying sanctions will have such consequences.

The settlement requires Unikrn to permanently disable its blockchain-based token, which it had integrated into its product offerings, and pay a penalty of $6.1 million, which represents substantially all of the company’s assets. In other words, the Commission is effectively forcing the company to cease operations because of an allegedly improper offering of supposed securities.[3]

While I do not concur in my colleagues’ opinion that Unikrn’s token offering constituted a securities offering, I recognize that the determination of whether an instrument is offered and sold as a security in the form of an investment contract requires a subjective weighing of the facts and circumstances. Such analysis, idiosyncratic by its very nature, does not produce clear guideposts for entrepreneurs and others to follow. The challenge of discerning a clear legal line is especially difficult with respect to new forms of business and novel technologies. Entrepreneurs may be forced to choose between unpalatable options: expending their limited capital on costly legal consultation and compliance or forgoing their pursuit of innovation due to fear of becoming subject to an enforcement action. A regulatory safe harbor could resolve this unhappy dilemma.

As I proposed earlier this year,[4] a well-designed, narrowly tailored regulatory safe harbor would efficiently and effectively combine the Commission’s interest in protecting investors with developers’ ambition to experiment. Affording a company like Unikrn a three-year regulatory window within which to further develop and refine its platform—while still subjecting it to the antifraud laws—would provide benefits to token purchasers, token issuers, and the Commission.

Imagine if such a regulatory safe harbor had been available to Unikrn. Instead of permanently disabling its tokens as a result of today’s settled enforcement action, Unikrn, in concert with its tokenholders, might be devoting its time and resources to identifying new uses for the token and expanding its user base. Although some may not see the loss of the benefits of innovation as large in this specific instance, posterity will feel the cumulative loss to society of innovation forgone because of such actions. Indeed, we will never know the full magnitude of such losses because some would-be entrepreneurs, having seen one too many Unikrns, may decide it wiser to shelve their most transformative ideas.

By failing to challenge ourselves to experiment with new approaches to regulation, we, and those whose interests we are pledged to serve, risk surrendering the fruits of innovation. I respectfully dissent from the Commission’s actions today relating to Unikrn.

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Bank of England Governor Andrew Bailey Says Bitcoin Falls Short in Payments but Stablecoins May be Useful

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Andrew Bailey, the Governor of the Bank of England, spoke at the Brookings Institue in the US this week and he tackled a hot topic: cryptocurrencies. More specifically, Bailey spoke about the efficacy, or lack of, when using certain digital assets in payment transactions.

Bailey said that while Bitcoin may have “extrinsic value” it has no connection to money and is unsuited for the world of payments.

Stablecoins, on the other hand, may have merit, according to the Governor:

“Some stablecoin proposals may be used to facilitate investments. However, where a stablecoin is used to facilitate the transfer of ‘money’ for buying goods and services and the settling of debts, then it may become widely used a means of payment and store of value.

Global stablecoins seek to apply new technology, stemming from the world of crypto-assets, as well as changing some of the fundamentals of the underlying payment chain. They change not only how you pay but what you pay with – rather than a transfer of money between bank accounts, stablecoin systems transfer the asset itself – the stablecoin – from one person to another.

Stablecoins could offer some useful benefits. For example, they could further reduce frictions in payments, by potentially increasing the speed and lowering the cost of payments (particularly if global stablecoins were to be established). Stablecoins may offer increased convenience, including via integration with other technology, such as social media platforms or retail services.”

Bailey appears to be supportive of innovations in digital currency but he rightly points to a need for stablecoins to adhere to standards of operation similar to other forms of payments and transfers.

Bailey said that some stablecoins fall short in hitting this standard:

“Some stablecoin proposals do not include a legal claim for coin-holders. And some stablecoins propose backing in instruments that may have material market, credit and liquidity risk, but do not have the money protections I have outlined. While this might be acceptable for speculative investment purposes, it would not be for payments widely relied upon by households and businesses. Stablecoins need to offer coin-holders a robust claim, with supporting mechanisms and protections to ensure they can be redeemed at any time 1-to-1 into fiat currency.”

Global stablecoins must have “robust governance” and be transparent in structure. Regulators must be part of the mix if an aspiring stablecoin issuer is to be deemed worthy of achieving its mission.

As for Central Bank Digital Currency (CBDC), Bailey echoes a sentiment that has been stated by many others – that a CBDC requires careful consideration and study prior to any utilization. The Bank of England has been exploring CBDCs – along with many other jurisdictions.

Jackson Mueller,  Director of Policy and Government Affairs at Securrency – a Regtech/Fintech that is seeking to facilitate “a new financial services infrastructure to leverage the benefits of blockchain technology,” shared the following comment after Bailey’s speech:

“There’s a particular part of Andrew Bailey’s remarks that should reverberate within regulatory agencies, the halls of policymakers, and industry offices. That is, the need for a wider debate when it comes to the future of payments and how payments innovations are going to interact and interoperate across networks and borders,” said Meuller. “For too long we have pigeonholed ourselves into looking at cryptoassets, stablecoins, CBDCs, among other forms of payment, strictly within the silos of this terminology. In essence, we’re missing the forest for the trees.”

Mueller said that what needs to be examined in much further detail and with greater emphasis is the underlying architecture that supports these and future payments innovations and how such a system can be (and are currently being) developed in a manner that is capable of responsibly managing the movement of value across disparate systems and in a way that promotes innovation, while maintaining robust regulatory standards that protect the underlying financial services ecosystem.

“What this points to is a recognition that all of these forms of value can move across common compliance and security rails without creating a monolithic network and while preserving technological optionality.”

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SEC to Hold Open Meeting to Address Accredited Investor Definition

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The Securities and Exchange Commission (SEC) has scheduled an open meeting of the Commission to address several regulatory issues including an update to the current definition of an Accredited Investor.

Regarding the Accredited Investor definition the SEC states it will consider:

“whether to adopt amendments to the definition of “accredited investor” in Commission rules and the definition of “qualified institutional buyer” in Rule 144A under the Securities Act to update and improve the definition to identify more effectively investors that have sufficient financial sophistication to participate in certain private investment opportunities. The amendments are the product of years of efforts by the Commission and its staff to consider and analyze possible approaches to revising the accredited investor definition.”

Currently, an Accredited Investor is determined off a wealth metric. An individual who earns over $200,000 a year, or has a net worth of over $1 million (minus their primary residence), is deemed accredited. If the individual is married, the salary metric rises to $300,000. Individuals who are accredited may participate in certain exempt offerings like securities issued under Regulation D – an enormous market of over $1 trillion annually.

While the wealth metric is currently in place in an attempt to defend individuals the government believes are not capable of making these types of investment decisions, it is widely believed the metric misses the mark as sophistication is obviously a far better metric.

Individuals who have the experience, or education, to assess investment risk are understandably better positioned to make decisions on more esoteric investment opportunities.

As private markets have boomed, and public securities have waned, a generation of retail investors has been boxed out of some of the most promising investment opportunities. Some observers believe the current definition has acerbated the wealth disparity as private securities have grown in popularity for institutions and the very wealthy. Even in light of this, some individuals believe the government should make it more difficult for even highly sophisticated individuals to purchase private securities.

Any update or change to the definition will be closely watched by the industry engaged in capital raising including online capital formation.

The second item to be considered by the Commission is:

“whether to adopt amendments to modernize the description of business, legal proceedings, and risk factor disclosures that registrants are required to make pursuant to Regulation S-K. These disclosure items, which have not undergone significant revisions in over 30 years, would be updated to account for developments since the rules’ adoption or last revision, to improve disclosure for investors, and to simplify compliance for registrants. Specifically, the amendments are intended to improve the readability of disclosure documents, as well as discourage repetition and the disclosure of information that is not material.”

Regulation S-K reporting requirements have become increasingly arcane. The Commission may attempt to make reporting requirements more approachable to a wider audience.

The meeting of the Commission will take place on August 26, 2020, at 10 AM ET and is open to the public as it will be live-streamed on the SEC website.

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