Earlier this month, U.S. Securities and Exchange Commissioner Hester Pierce made a speech proposing a time-limited safe harbour for crypto asset token offerings to address what she sees as a regulatory “Catch 22” in the digital asset sector. We think Commissioner Pierce’s speech is interesting because of the way she leapt out in front of the SEC’s policymaking framework with her proposal and because of the potential for her approach to influence Canadian securities regulators and market participants as well. The Canadian securities regulatory framework isn’t exactly the same as the U.S. framework, but there are enough similarities to make these developments south of the border of interest in Canada, too.
In the U.S. and Canada, the term “security” is defined very broadly to include, among other things, an “investment contract”. In determining whether an investment contract exists, regulators and courts in both countries usually consider, among other things, whether investors are participating in a common enterprise and relying upon others to profit from that enterprise. (For more information on the Canadian regulators’ approach, see our June 2018 bulletin article “CSA Staff Publish Follow-up Guidance on Token Offerings.”)
Explaining the regulatory Catch-22 and why she sees a need for regulatory relief, Commissioner Pierce stated:
“Would-be networks cannot get their tokens out into people’s hands because their tokens are potentially subject to the securities laws. However, would-be networks cannot mature into a functional or decentralized network that is not dependent upon a single person or group to carry out the essential managerial or entrepreneurial efforts unless the tokens are distributed to and freely transferable among potential users, developers, and participants of the network.”
She then outlined a proposed safe harbour for “Initial Development Teams” to facilitate participation in, and the development of, a functional or decentralized network, exempt from the SEC’s registration requirements of U.S. federal securities laws for three years, so long as certain conditions are met and while remaining subject to federal securities anti-fraud laws. Among other requirements, the Initial Development Team would have to make certain information publicly available (e.g. regarding the source code, initial development team and certain other token holders, transaction history, token economics, plan of development, prior token sales, trading platforms, etc.)
The SEC has some leaping of its own to do if it wants to develop Commissioner Pierce’s proposal or take a different approach. AUM Law will monitor developments in this area and keep you informed. This changing regulatory landscape highlights the importance of obtaining legal advice if your business plans contemplate the use of crypto-currency. AUM Law has experience in this area, and we can help you navigate its regulatory challenges.
February 28, 2020