The United States Securities Commission (SEC) introduced a draft rule entitled “encrypted assets regulations”, which for the first time attempted to deal with fund-raising in a formal manner rather than relying primarily on law enforcement cases. If the draft is finally adopted, the Native United States project will have a clearer compliance path when issuing a token.
Two funding waivers.
The draft envisages two arrangements for the sale of unregistered tokens. One is a smaller-scale fund-raising that allows projects to raise up to $5 million in one-time over four years. The second is a larger fund-raising exercise, which allows for the collection of up to $75 million over a 12-month period, close to the existing Reg A+ Tier 2 framework in the United States.
Both types of arrangement require the issuer to provide a narrative disclosure based on principles, in a form closer to the project white paper, rather than a registration document for traditional securities. Of this amount, $75 million is also subject to financial statements and ongoing disclosure obligations. At the same time, it is proposed that federal rules will take precedence over the requirement of registration at the state level for the issuance and partial secondary transactions eligible for exemption.
Safe harbour provisions focus.
The draft also includes a safe harbour arrangement that is of greater industry interest. It is proposed that as long as the issuer has completed or permanently discontinues the critical management of its previous commitments, the eligible tokens will no longer be considered part of the investment contract.
This design echoes the idea of a safe port of tokens proposed by SEC Commissioner Hester Pierce in 2020. For a long time, the encryption industry has required regulators to provide clearer exit criteria to determine when a token will no longer fall into the securities law framework.
Or change the U.S. token distribution structure.
Over the past years, the handling of fund-raising for encryption has been dominated by litigation and law enforcement. Following a surge in the issuance of tokens, regulators identified a large number of token sales as the issuance of unregistered securities, which led to many projects moving to offshore structures such as Cayman, Switzerland or restricting sales only to investors outside the United States.
Against this background, the market has also seen the emergence of alternative approaches such as fund-raising, airdrops, credit schemes and so forth, aimed only at qualified investors, in order to avoid as much as possible the legal risk of “public currency sales”. Landing on the draft would mean that for the first time in the United States market there might be relatively clear domestic currency-raising channels.
This rule is still at the proposal stage and has not yet entered into force. However, for encryption projects, legal advisers and investment agencies, the shift from “law enforcement” to “rules-driven” has been the most direct signal from this proposal.