US Securities and Exchange Commission (SEC) commissioner Hester Peirce has rocked the crypto and blockchain world today with a speech at Chicago's International Blockchain Congress suggesting that crypto businesses should have a three-year harbour period from their initial token sales before the SEC determine whether they need to comply with the agency’s securities laws.
“Today, SEC Commissioner Hester Peirce announced a proposed safe harbor for certain tokens under the federal securities laws. The Chamber of Digital Commerce encourages efforts to create a path for innovators to create and circulate digital tokens as they develop their networks toward a decentralized or functional technology platform.”
“The proposal exempts transactions involving digital tokens from the Securities Act of 1933 if the token is intended to be decentralized or functional within 3 years, and also contains additional disclosure requirements for the digital token developers. The safe harbor would allow token developers to begin their projects with clear parameters and disclosure requirements as they ideate, define, and begin to develop their solutions.”
“We look forward to working with Commissioner Peirce and her team to develop this proposed Rule, which has the potential to provide a clear path forward for those creating new innovations and solutions leveraging digital tokens.”
“The analysis of whether a token is offered or sold as a security is not static and does not strictly inhere to the digital asset,” stated Peirce, who has floated the idea of a safe harbour in the past and Thursday's proposal appears to be the first formal attempt to make it a reality.”
“The safe harbour is also designed to protect token purchasers by requiring disclosures tailored to the needs of the purchasers and preserving the application of the anti-fraud provisions of the federal securities laws,” according to Peirce’s notes.
Coindesk had access to the proposal:
“Specifically, the proposal defines an “initial development team,” which will manage the network’s development over its first three years, and “network maturity,” referring to a network that is “not controlled and is not reasonably likely to be controlled” by a single entity or individual but is operational.”
“The development team should disclose “the names and relevant experience, qualifications, attributes or skills” of each member, as well as how many tokens each member holds and how many they may earn through founders' rewards or similar programs.”
“The definition of Network Maturity is intended to provide clarity as to when a token transaction should no longer be considered a security transaction but, as always, the analysis will require an evaluation of the particular facts and circumstances,” the proposal states.”
Peirce said the safe harbour proposal is tied to development teams acting in good faith and would not be available to any teams with members who had run-ins with the SEC in the past and it was not likely to apply to operational projects, adding her goal is to focus on new projects in their initial stages of development so as to ensure they can move beyond their first steps in building a network or community.
“This bad actor provision is not directed at teams that set forth a plan for a network and work earnestly toward building it, but fail to bring it to fruition. Rather, it is designed to ensure that the SEC can bring suit against a team that sets out to defraud token purchasers by materially misrepresenting or omitting key information,” Peirce said. “We all know that there are plenty of those kinds of ‘projects' polluting the crypto space.”
According to Murphy & McGonigle’s 2019 Blockchain Litigation Year in Review Report:
- the Southern District of New York (SDNY) has more blockchain litigation than anywhere else
- the SEC remains Active with high profile enforcement activity
- regulatory enforcement actions have declined
- American courts have issued rulings which will affect the blockchain industry
- the SEC’s Path to Compliance is a ‘road less travelled.
- After the SDNY with 54 cases in 2019, the SEC is the second most litigious source with less than half the number of cases (22). It is followed by SD Florida and ND Cal (both 19) and EDNY (15).
- While the States took a step back, the SEC filed 43% more blockchain enforcement actions in 2019 (compared to 2018). These included three high-profile enforcement actions
Created in 2018 by Murphy & McGonigle’s Innovation Lab, the Blockchain Litigation database is a proprietary, data-based tool that monitors US litigation in the blockchain industry. The Blockchain Litigation database is the basis for analyses and interpretations appearing in the Blockchain Litigation Year in Review Report.
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