cryptocurrency, bitcoin, ethereum, crypto
If a cryptocurrency or altcoin is a security, it must be offered to US investors in an offering registered with the Securities and Exchange Commission ("SEC") or fit into an exemption.
Registration can cost anywhere from hundreds of thousands of dollars to well over a million, and requires that you disclose a lot of information you may not want public. So finding an exemption is usually the preferred route.
Right now, the main exemptions for securities offered in the US are: Reg D, Reg A+ and Reg CF. There is also Reg S for foreign securities offerings, and you’ll read about that in a separate post.
Preemption & Disclosure
Two quick notes before you learn about the exemptions:
Private offerings are the most common security exemption. The key feature that makes private offerings “private” is that you can’t “generally solicit” your offering, meaning you can’t publicly market it.
There is a broad “private offering” exemption via Section 4(a)(2) of the Securities Act of 1933. But Section 4(a)(2) is open-ended and determined on a case-by-case basis, so most private offerings are done through Regulation D ("Reg D").
Regulation D is a more defined exemption that falls under Section 4(a)(2). That is, it’s a more certain safe harbor. There are two main Reg D options: 506(b) and 506(c). Their features are generally the same, except as noted below.
The key tradeoff here is that Rule 506(c) offerings can be generally solicited, but the issuer must verify investors are accredited. This verification includes much more invasive steps that may keep investors away.
Reg A+ was meant as a “mini-IPO” exemption and is divided into two possible tiers. It includes some filing and reporting requirements with the SEC, but these requirements are generally less onerous than a full registration.
The unique feature of Reg CF is that the offering must be done through a crowdfunding portal that is registered as a broker-dealer with the SEC and FINRA. Typically, this would be an entity like Indiegogo or Kickstarter.
For ICOs, the key pros and cons are:
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