SEC Issues Framework

SEC Qualifies First Issuance of Digital Token Under Regulation A+

In Short

The Situation: As the U.S. Securities and Exchange Commission ("SEC") continues to bring enforcement actions to stop unregistered sales of digital tokens, blockchain companies are exploring ways to sell tokens to the public in compliant ways.

The Result: Blockchain start-up Blockstack obtained from the SEC qualification of its offering statement for the first-ever digital token offering under Regulation A+ ("Reg. A+"), which is a cheaper way to raise capital than a traditional IPO. European authorities likewise have welcomed compliant offerings of digital assets, with several gaining approval in Germany and increased activity in France after the passage of new legislation early this year.

Looking Ahead: Regulatory approval for digital token sales provides a path forward and some measure of optimism for the future of compliant token offerings, even though hurdles remain.

On July 10, 2019, the SEC qualified the offering statement for the first-ever digital token offering under Reg. A+. Blockstack, a blockchain start-up, launched the $28 million token offering under the registration exemption that was enacted as part of the JOBS Act.

Reg. A+ is intended to be a substantially cheaper alternative to a traditional IPO. It reduces disclosure obligations and still allows companies to raise up to $50 million in a 12-month period. In addition, as compared to other registration exemptions, Reg. A+ offerings can target a wider scope of retail investors, in addition to institutions and wealthy individuals.

The Blockstack offering is not the first chance that the SEC has had to review and comment on a digital token offering. Other offerings, including those submitted under a more traditional IPO path on Form S-1, have been met with significant scrutiny, which has led to several potential offerings being abandoned before completing the SEC review process.

As the first-ever digital token offering pursuant to an SEC-qualified offering statement, Blockstack's token offering is a possible indication that the SEC's enforcement efforts against unregistered digital token sales and its guidance on the application of securities laws to digital tokens are having the intended effect—pushing the market to offer and sell digital assets in a compliant way.

As companies continue to look to raise capital by selling digital tokens in a compliant manner, Reg. A+ may prove to be appealing. For example, the day after Blockstack's offering was qualified, it was announced that YouNow's Props Project became the second digital token offering to have its offering statement qualified by the SEC, also under Reg. A+.

Still, cost and timing hurdles may discourage some companies from taking this fundraising route. It was reported that Blockstack spent around $2 million on its compliance and offering documents. And public filings show that it underwent a rigorous 10-month review process before becoming qualified.

Outside of the United States, companies likewise have had incipient success with gaining regulatory approval for token offerings. In Germany, a lending platform named Bitbond launched in January 2019 a €100 million security token offering ("STO"), which was the first to be approved by the German financial regulator BaFin. And in July, BaFin approved a €50 million STO by a German venture capital investment fund named StartMark and a €250 million STO by Fundament Group, Germany's first issuer of a real estate-backed token.

With the increased STO activity in Germany, BaFin provided additional guidance on the classification of tokens in April 2019. It said that tokens representing investments in the form of profit participation, loans, or registered bonds—which in their traditional form do not qualify as securities under the German prospectus regime—may be classified as securities if issued in token format because of the increased tradeability of tokens. In June 2019, the German legislature also introduced a draft bill to extend licensing obligations for financial and banking services related to cryptoasset (Kryptowerte) business models.

Other countries, such as France, have put in place specific legal regimes that allow nonlisted securities to be issued and traded as digital securities using distributed ledger technology (instead of traditional systems). In April 2019, a French bank was one of the first to take advantage of the new law to issue bonds on the Ethereum blockchain.

News of regulatory approvals provides some measure of optimism for the future of compliant digital token offerings and a potential path for other companies to follow.

Three Key Takeaways

  1. The SEC's enforcement efforts against unregistered digital token sales and its guidance on the application of securities laws to digital tokens show some success in pushing market participants toward compliant offerings.
  2. Successful applications for offerings of digital tokens in the United States and Germany provide a path forward for some blockchain companies to raise money in a compliant way.
  3. Questions remain in the United States whether Reg. A+ will be a realistic way for companies to conduct compliant digital token sales, as costs and timing obstacles could still discourage the wider adoption of Reg. A+ offerings.
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