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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INX Security Token Sale Starts this Week, Seeks up to $117 Million

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INX Limited, a company that filed an F-1 with the Securities and Exchange Commission (SEC) in 2019, that was subsequently approved earlier this year, will kick off its public sale of the digital asset this week on August 25, 2020. The security token (INX) will entitle purchasers pro rata distribution of the company’s net cash flow from operations according to the filing.

INX Limited is a Gibraltar domiciled firm that is developing INX Trading Solutions, described as a single entry-point for users for the trading of cryptocurrencies, security tokens, and their derivatives. Up to 130 million INX tokens may be sold generating $117 million ($0.90 a token) before fees if the offering is completely sold out. The minimum hurdle has been set at $7.5 million.

The company has assumed that 100% of the INX Tokens sold in this offering will be sold to non-U.S. persons. INX has enlisted the assistance of A-Labs to market the offering outside the US.

The offering notes that there is currently no secondary market for the digital security and no guarantee of one but obviously at some point one would anticipate it will trade on an exchange, ATS, or some marketplace.

INX touts the fact it has worked directly with regulators from the beginning as opposed to many digital asset platforms that skirted the laws only to decide to become compliant after the fact. As well, management points to the fact it developed its own tech stack as opposed to licensing it from a 3rd party provider.

INX benefits from the participation of managers as well as advisors that have traditional financial markets experience. Founder and President Shy Datika has more than 25 years of experience in the banking and finance industry and is a founder and former CEO of ILS Brokers, a multinational brokerage house based in Tel-Aviv, Israel.

The INX security token offering is interesting as it is global, compliant with a digital asset that is both a security as well as a utility. As a security, investors may generate income as well as a capital gain. As a utility, it may be used to cover fees.

The company states that there is a capped supply of 200 million tokens and anticipate this number will decline over time creating more value for remaining holders.

Have a crowdfunding offering you’d like to share? Submit an offering for consideration using our Submit a Tip form and we may share it on our site!

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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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