cryptocurrency, bitcoin, ethereum, crypto
Chairman Jay Clayton of the Securities and Exchange Commission ("SEC") recently made some comments that could have significant impacts for crypto and securities regulations. These statements, made at the August 29 Nashville 36|38 Entrepreneurship Festival, seem to have been missed by many.
Chairman Clayton began his speech saying that “[n]o conversation about recent efforts at the SEC to foster innovation would be complete without mentioning our approach to distributed ledger technology, digital assets, and [initial coin offerings ("ICOs")].”
He gave a short overview urging caution for investors in the ICO space, but made this short comment in passing:
“Bill [Hinman] recently outlined the approach the staff takes to evaluate whether a digital asset is a security, and I strongly encourage you to take a look at Bill’s speech.”
Translation: Clayton endorsed the analysis that SEC Division of Corporation Finance Director, William Hinman, made in his June 4 speech at the Yahoo Finance All Markets Summit. You know - the talk where he said Ethereum probably isn’t a security. Which is significant in ways most haven’t appreciated yet. You can read about the significance of Director Hinman’s comments here, but, in many ways, Director Hinman’s comments were the first recognition that there is a new “digital asset” class.*
In even simpler terms: Chairman Clayton arguably endorsed Director Hinman’s statements and analysis that Ethereum is not a security.
The other significant comment that Chairman Clayton made was that the SEC needs to rethink the current offering exemption framework. Generally, sales of securities in the US must be registered or qualify for an exemption. Right now, one of the most commonly used exemptions is for private offerings, which often requires that an investor is “accredited” (aka, has more than $2.1MM in net worth, or regularly earns $100k in annual income).
Chairman Clayton generally outlined how the SEC should approach rethinking the exemptions, but he makes a particularly interesting comment:
“We also should consider whether current rules that limit who can invest in certain offerings should be expanded to focus on the sophistication of the investor, the amount of the investment, or other criteria rather than just the wealth of the investor.”
Aka, maybe it’s time to re-think the “accredited investor” requirement and open up the private offering exemption to more people.
The ICO ecosystem was partially built on a frustration that only the wealthy can access good investments due to the accredited investor threshold. Of course, these kinds of restrictions are meant to protect everyday mom-and-pop investors who can’t (or shouldn’t) take the risk of being misled to invest in something like Bitconnect. But now that crypto is waking up the reality that a lot of tokens are securities, expanding private offering exemptions would open the floodgates for capital to flow into crypto, and fuel the ICO market even more.
We’ve already seen some attempts to open up the offering exemptions. For example, one of the exemptions in Reg A+ looks at the amount an investor invests relative to his or her overall income or net worth. Reg CF similarly looks at an investors income and net worth, but doesn't outright ban investors under $100k; instead, it just limits how much they can invest relative to their income or net worth.
So the trend towards softening the "accredited investor" requirements has been brewing for a while, but Chairman Clayton's comments sound like the SEC is ready to revamp the whole framework in a way that could open up capital formation for private companies a lot more.
TL;DR: the Chairman of the SEC arguably endorsed that Ethereum is not a security, and that the timing is ripe to rethink private offering requirements like "accredited investor" status. Both of these are good news for the future of crypto.
Reginald Young is a licensed attorney in California, where he works with private investment funds and startups in the crypto industry. You can connect with him here.
*Recent regulatory trends increasingly suggest that crypto may correctly be imagined, generally, as: (i) “currency” tokens like Bitcoin, that are meant to function entirely as digital money and are not securities; (ii) “digital assets” like Ethereum that have utilitarian functions in addition to or instead of currency functions, and may be securities; and (iii) security tokens that are, in essence, tokenized forms of equity or ownership. Of course, this is a simplification and you can add additional categories and subcategories. But it illustrates the point that Director Hinman’s comments may be viewed as the first recognition that the second category (“digital assets”) may be a new asset class of potential non-securities.