cryptocurrency, bitcoin, ethereum, crypto
Given increasing scrutiny from the Securities and Exchange Commission (“SEC”), Initial Coin Offerings (“ICOs”) are trying to limit their exposure to SEC regulation by placing themselves outside SEC jurisdiction.
The main way ICOs are doing this (...or are unintentionally trying to do this) is by fitting into Regulation S (“Reg S”).
What’s Reg S?
In simple terms, Regulation S is an exemption for securities offerings issued outside the US that don’t involve US investors. It’s the exemption that says “hey if you have nothing to do with the US, the SEC doesn’t have jurisdiction over you because they’re a US agency.”
Reg S has a complicated framework, but for ICOs wanting to fit into the exemption, the offering cannot be made to “U.S. Persons”.
...What's A U.S. Person?
A big problem is most investors (individuals and entities) think that, when an ICO asks, "U.S. Person" means what it means in everyday speech. However, Reg S has a unique definition of “U.S. Person”. The definition is even different from most other securities laws that define what a U.S. Person is.
Rule 902(k) of the Securities Act of 1933 defines “U.S. person” for Reg S purposes as:
In other words, the Reg S definition of U.S. Person is a good t hing to read if you find yourself awake late at night and need something to make you fall asleep.
The Reg S U.S. Person definition is hard for pretty much all US investors to get around because...well, that’s what it was intended to do. Most, if not all, individuals and institutional investors will qualify as U.S. Persons, no matter how creative they get.
So there's a sort of cat-and-mouse game going on: ICOs won't let US investors in, but they want a lot of US investment money. So many ICOs shield themselves from the SEC by requiring that investors "represent" that they aren’t U.S. Persons under the Reg S definition. The problem is many institutional investors don't know "U.S. Person" has a unique definition that they can't get around.
And, of course, many investors are ignoring this entirely, setting up a VPN and representing that they aren’t a U.S. Person. The big risk with that, however, is if a token issuer ends up getting dinged by the SEC as a result of U.S. investors that represented they weren't U.S. investors, the token issuer could potentially sue US investors for their misrepresentations.
Questions? Comments? Let us know below!
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