United States: Conducting A Token Offering Under Regulation A

Last Updated: October 16 2019
Article by Robert Rosenblum, Amy Caiazza and Taylor Evenson

Whitepaper: Conducting a Token Offering Under Regulation A1

This white paper discusses considerations related to conducting a token offering under Regulation A under the Securities Act of 1933 (the "Securities Act"). The benefit of this strategy is that it can allow broad distributions of freely tradable tokens to their intended users. In July of 2019, two companies – Blockstack PBC ("Blockstack") and YouNow, Inc. ("YouNow") – successfully launched the first two token offerings under Regulation A, working in collaboration with Wilson Sonsini Goodrich & Rosati ("WSGR"). Below, we describe why Regulation A is a good option for many token issuers, the qualification process, and how token issuers should prepare for that process.

The Business Opportunity: Distribution of Freely Transferable Tokens to a Wide Audience

For many (if not all) companies developing blockchain-based technologies that involve digital assets ("tokens"), success is dependent on two critical issues: (1) the ability of a project sponsor (the "token issuer") to distribute tokens broadly to its targeted users, often as rewards for contributing to a project's development, and (2) free transferability of the tokens, without which the tokens are of limited use or value. These two elements together can encourage use and development of a new platform, which in turn can allow it to then achieve visibility and market saturation. In contrast, without these two features, it is unlikely that a token-based platform will be able to fully develop, much less achieve success.

THE PROBLEM

Throughout much of 2017 and 2018, many companies developing blockchain-based technologies (and their counsel) steadfastly took the position that tokens were not securities and that, as a result, the federal securities laws did not apply to limit a developer's ability to distribute freely transferrable tokens broadly.

This ultimately did not serve the developer's interests. The now well-known speech given by William Hinman, Director of the Securities and Exchange Commission's ("SEC") Division of Corporation Finance, in June 2018, confirmed that the SEC viewed virtually all tokens besides Bitcoin and Ether to be securities. Recently, the SEC has issued two no-action letters (the "token NALs"), to TurnKey Jet, Inc. and Pocketful of Quarters, Inc., that suggest that tokens under significantly constrained circumstances could also not be securities.

As described in these token NALs, for a developer to rely on the SEC's relief, proceeds from the developer's token sales cannot be used to build the platform, the tokens need to be immediately functional upon sale, transfers can only be allowed to wallets on the platform, tokens can only be sold at a fixed price, repurchases could only be at a discount to the fixed price, and the token cannot be marketed in a manner to suggest potential increases in market value.

DEVELOPMENT TIP

If your token is not Bitcoin, Ether, or subject to the extensive restrictions described in the token NALs, there is a high likelihood it's a security. There are thousands of outstanding tokens, and at least to date, the SEC has determined that exactly four can be treated as something other than a security. The federal courts that have considered whether a token is a security have generally agreed with the SEC.

Because most tokens are considered securities under the federal securities laws and the token NALs suggest most tokens will remain securities, token issuers cannot engage in broad distributions of freely transferable tokens without complying with those laws. Under the federal securities laws, any offering and sale of a security must be either registered with the SEC or comply with an exemption from registration. Most frequently, token issuers rely on exemptions for private offerings made only to "accredited investors" (generally, individuals with at least $1 million in net worth or annual income of $200,000, $300,000 with a spouse, or entities with $5 million in assets) or only to non-U.S. persons. This has meant that many intended users of a platform cannot receive the tokens. In addition, because securities offered in reliance on these exemptions are not tradable for at least a year and a day after their distribution, tokens distributed in this manner are not freely transferable. Even after the yearlong holding period, token issuers cannot receive the tokens and re-distribute them without complying with the same restrictions.

DEVELOPMENT TIP

We commonly hear a number of questions from developers who feel confident that their token is one of the special, few non-security tokens: "But wait! My platform is really decentralized. My tokens aren't securities, are they?" and "I'm creating a stable coin...that's not a security, is it?" The answers to all of these questions can be found in SEC v. W.J. Howey Company (1946), in which the Supreme Court found that an instrument meets the definition of an "investment contract" under the Securities Act if it involves "an investment of money in a common enterprise with profits to come solely from the efforts of others." The fact that tokens involve new or different technologies does not mean that Howey is inapplicable. The new or different is precisely what Howey is designed to address. Remember that Howey involved orange groves, and the SEC has used the Howey analysis to take the position that interests involving concert tickets, golf club memberships, and ferrets can be securities. The Howey definition is far-reaching.

Footnotes

1. This paper was written by Robert H. Rosenblum, Amy Caiazza, and Taylor Evenson in WSGR's Blockchain and Cryptocurrency group, which is part of our Securities Regulatory and Complex Transactions group1. This paper was written by Robert H. Rosenblum, Amy Caiazza, and Taylor Evenson in WSGR's Blockchain and Cryptocurrency group, which is part of our Securities Regulatory and Complex Transactions group

To view full Article, please click here .

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions