Please consider these comments on how the proposed rule will be affected. 1. Introduction Chair Gensler’s attempt to brute force crypto assets that may not even constitute “securities” into an ill-fitting disclosure framework is bad policy: it fails to provide crypto asset users and investors with the information they need, while also denying crypto entrepreneurs a viable path to compliance.1 As we note in Section 2 below, the current SEC disclosure framework was established in the 1930s and designed to regulate the securities issued by centralized companies for fundraising. However, as discussed in Section 3, crypto asset markets differ from securities markets in fundamental ways. Unsurprisingly, without major changes to the SEC’s current disclosure regime, the SEC is unable to effectively regulate crypto asset markets. Section 4 discusses two key issues that need to be clarified to determine whether transactions involving the sale of crypto assets are required to be registered in the first place. Section 5 then highlights how the current disclosures required by Form S-1, one of the most widely used registration forms, do not provide the right mix of information to crypto asset users or investors.2 This is not to say that developers of crypto projects should be exempt from having to make any disclosures when they fundraise through the sales of crypto assets. Rather, our point is to highlight why regulators need to be more thoughtful about developing a viable framework that gives tokenholders the information they need and deserve.3 2. Current SEC disclosure regime was developed for securities issued by centralized companies Securities such as stocks and bonds represent a legal claim against, or interest in, the assets and profits of a specific legal entity. Those legal entities are controlled by company management and a group of “insiders” who have access to non-public information that can affect the value of the company’s securities and can be exploited to the detriment of the public and the market. As discussed in Part II, federal securities laws address information asymmetries by requiring issuers of securities to register and publicly disclose material information to enable investors to make informed investment decisions. While the Securities Act of 1933 (the “1933 Act”) is the principal federal statute governing public offerings of securities, it is supplemented by various rules and regulations promulgated by the SEC that include additional requirements for public offerings of securities, including Regulation C,4 Regulation S-K5 and Regulation S-X.6 In addition, most issuers of registered securities are required to keep these disclosures current by filing quarterly and annual reports, as well as disclosing material events as they arise. Critically, the SEC disclosure framework is entirely dependent on the existence of a centralized legal entity that issues the securities - i.e., the framework presumes that there is an entity, the “issuer”, which creates a legal relationship with investors by distributing an instrument that represents that legal relationship (e.g., stocks or bonds). It is this legal entity, this issuer, that of necessity is the driver of the value to investors in securities. Accordingly, when a company registers an offering of securities on the SEC’s Form S-1, it is required to provide a number of disclosures about the company’s history, operations, financial statements, leadership, risks it may face, and other information about its business. While these disclosures are clearly relevant for investors trading securities issued by centralized legal entities, they fail to adequately inform crypto asset users and investors because, as shown in the next section, the disclosures do not reflect crypto assets’ unique qualities. 3. Markets for crypto assets differ fundamentally from securities markets Crypto asset markets differ in meaningful ways from securities markets. As a result crypto requires a different regulatory framework with disclosures tailored to the unique nature of crypto assets and market regulation that reflects the “stack” on which crypto assets trade. As explained below, an adequate disclosure framework for crypto assets that are sold in investment contract transactions must, at a minimum (a) distinguish between the legal rights against issuers that define securities and the technological abilities in protocols that define many crypto assets; (b) reflect that, unlike securities, crypto assets exist independent of the entity that initially sold these assets in fundraising transactions; (c) reflect that crypto assets can accrue value differently than securities; and finally (d) reflect that crypto assets operate, trade and settle on a very different technology “stack” than that used for the trading of securities. a. Most crypto assets do not provide legal rights against an identifiable “issuer,” but rather provide technological abilities enforced by a blockchain-based protocol As compared to stocks or bonds, crypto assets typically do not represent ownership of an interest in a legal entity, nor any type of legal claim against one.7 Even when crypto assets are originally “minted” by a development company, they generally do not make the token holders part owners of that company, nor do they provide any legal rights to dividends or other income generated by that company. Crypto assets also do not typically provide any governance rights applicable to a company, such as the right to elect the board of directors or to vote on other matters directly affecting the company. Instead, owners of crypto assets are endowed with certain technological abilities within a protocol that are enabled by smart contract code. While these technological abilities are sometimes referred to using terminology borrowed from corporate law (e.g., “governance rights”), they are completely different from traditional corporate legal rights. The code associated with crypto assets can provide token owners with abilities that are enforced ex-ante through technological permissioning. The specific technological abilities of crypto assets is publicly verifiable by sophisticated actors. Importantly, a crypto asset’s technological abilities can also be outside of the control of the individual or entity that originally deployed the code that created the crypto assets and related protocol.8 In stark contrast, securities rely on legal rights against a centralized entity, like a shareholder’s right to receive a dividend from a company or vote to elect its board. These legal rights need to be enforced through an ex-post adjudication by a judicial or similar proceeding. As discussed further in Section 5(a), an appropriate disclosure regime needs to recognize and address this critical difference between legal rights and technological abilities if it is to provide adequate information to tokenholders. Current securities regulations simply do not accomplish this. b. Crypto assets can exist independent of the existence of an “issuer” Crypto assets are also fundamentally different from securities because they can exist and function as intended independent of the ongoing existence of the legal entity that created them. In some instances, crypto assets may even be created programmatically through a process that does not involve any legal entity that could be classified as the “issuer” of the assets. Securities of necessity depend on their issuer—the legal entity that created them—for their continued existence. For example, if a company dissolves, its shares cease to exist in any meaningful way, becoming at best a useless paper memento of strictly historical interest. However, crypto assets lack this dependence on an “issuer” and can continue to exist notwithstanding the dissolution of the company that created or “minted” them.9 Crypto assets created using an immutable protocol deployed on a public blockchain will retain their full on-chain functionality despite the dissolution of the entity that created them. This is because, as we discussed above, crypto assets do not depend on legal claims against a corporate entity, but rather on technological abilities provided by smart contract code deployed on a distributed protocol. This results in an arrangement that can be much more resilient in the face of extraneous or endogenous factors that may affect the going concern value of the issuer of securities or its ability to meet contractual promises contained in instruments it issued. In addition, some crypto assets are created programmatically in a process that does not require the actions of a legal entity (or individual) at all. For example, the Ethereum blockchain programmatically distributes new ether tokens to validator node operators that stake existing ether tokens to be able to validate transactions on the network. Those new ether tokens are not “issued” by a corporate entity for capital formation purposes, but rather automatically distributed to validators pursuant to the network’s consensus mechanism as a reward for confirming transactions and contributing to the security of the network. Other protocols also enable the programmatic creation of new crypto assets as “wrappers” for other crypto assets, like wrapped versions of a token otherwise residing on one blockchain network on another network. There is a similar “issuerless” process for creating liquid staking tokens.10 Therefore, the current disclosure regime’s myopic focus on the concept of an issuer, wholly appropriate when looking at securities, is at odds with the nature of crypto assets which exist independent of any issuers. Especially this. c. Crypto assets accrue value differently than securities Another key difference between crypto assets and securities is how each of them accrues value. It is basic financial dogma that the price of a company’s shares reflects the markets’ expectations of that company’s future financial performance (“discounted cash flow”). However, the value of many crypto assets is not tied to the financial performance of any centralized entity. This is most evident when looking at the markets for the most widely adopted and decentralized crypto assets like BTC or ETH which, like other commodities markets, are largely driven by general market forces and expectations of the future demand for use of the related protocol.11 But even in the context of nascent crypto projects that were launched by a development company, the value of crypto assets is often largely driven by factors other than the financial performance of the development company.12 People obtain crypto assets to use them within blockchain networks and applications or to hold them in anticipation of increased future demand for such use, as opposed to securities which are only ever passively held. A crypto asset’s utility as well as the underlying protocol’s mechanism design can therefore influence the value of the crypto asset more than the financial performance of the entity that created them. Moreover, given the open-source nature of most crypto asset-based projects, many crypto assets also accrue value from the contributions of a diverse group of developers outside of the development company or “founding team,” some of whom may remain pseudonymous. It is not uncommon for a development company to write the initial codebase for a new network or application, mint a native crypto asset, and subsequently seek to decentralize control of the project. For example, the development company may opt to transfer the permission to upgrade the smart contracts related to a specific network or application to crypto asset holders or a DAO so that future upgrades are decided by consensus. The developers can also transfer the permissions to a “burn” address, ensuring that no one is able to make any future changes.13 Further, such networks and applications may even be subject to “forks” and upgrades that are not supported or anticipated by the original developer. For example, the current Ethereum network is actually a fork of the original Ethereum network created in 2016 and now known as “Ethereum Classic”. As more applications emerge that build upon an original network or application and the original creators of the crypto asset have less and less control and influence over the project, purchasers of the crypto asset are less likely to rely upon the “efforts” of the original creator. It is also likely the creator will no longer have better information about the value proposition of the network or application relative to the broader decentralized community. d. Crypto assets operate on a fundamentally different “stack” than securities Crypto assets are also unique because they are traded on a fundamentally different technology “stack” than that used in the markets for securities. The shares of public companies, in particular, are traded, settled and custodied using a relatively archaic system that provides opportunities for numerous rent-seeking intermediaries. Therefore, while Chair Gensler may like to refer to his brokerage account as containing “digital assets,” these assets operate fundamentally differently than crypto assets.14 Publicly offered securities are typically issued using a paper certificate or are “dematerialized” (i.e., “certificateless”). The certificate or electronic record for a dematerialized security typically includes information about the security, such as the name of the issuer, the name of the holder and details regarding transfer restrictions. It is common for a security to be registered in “street name,” or in the name of the purchaser’s broker-dealer, rather than in the name of the purchaser. Many broker-dealers are members of The Depository Trust Company (or “DTC”), which is a not-for-profit SEC-registered clearing agency that custodies stock certificates and manages records of dematerialized securities. National securities exchanges require retail investors to purchase and sell securities on the exchange via intermediation by a broker-dealer that is a member of the exchange and such transactions are settled by a clearing agency, such as the DTC. In contrast to stock and bond certificates, crypto assets can trade and settle peer-to-peer on a 24/7 basis and be custodied directly by their owner, all without the need for any intermediaries. In addition, public permissionless blockchains rely on independent and unaffiliated entities to operate the nodes that process transactions, secure the network, and approve software implementations, which means, among other things, that major changes to the network require adoption by independent parties. The current regulatory framework for securities reflects the legacy market structure of the securities market. Forcing the trading of crypto assets into this framework would significantly hobble the development of the technology in the US by requiring it to run on the very rails it seeks to replace. 4. Clarity is needed to determine whether registration is required Despite Chair Gensler’s repeated claims that there is regulatory clarity for crypto projects, due to the SEC’s failure to provide actionable guidance on (a) when transactions involving crypto assets are securities transactions, and (b) if they are securities transactions, what type they are, it is impossible for projects to conclusively determine the fundamental question of when registration would be required and how such registration should be effected. a. When are crypto assets securities At this point, there is a general consensus that at least some crypto assets, in particular, BTC and its various forks or variations, are not securities. In addition, while Chair Genlser has been unable to convey a concrete view on this subject, most thoughtful commentators have concluded that ETH is also not a security—certainly, the CFTC has reached this conclusion.15 However, there is no clear agreement as to how the judicially mandated Howey and Reves tests would apply to most other crypto assets.16 As a result of the inherent complexities of these legal tests and the SEC’s unwillingness to meaningfully clarify their views as to how these tests should be applied to crypto assets,17 projects are incapable of making a definitive determination as to the status of most crypto assets. Both the Howey and Reves tests call for an assessment of the specific facts and circumstances associated with a given transaction to determine whether the federal securities laws apply. The tests are typically applied remedially, after a transaction has already occurred and a dispute has arisen which the parties are seeking to resolve in court. The “20/20 hindsight” and heavily fact-dependent nature of the analyses called for by these precedents can make it challenging for projects distributing crypto assets to apply these tests prospectively. The entity selling tokens must consider the totality of the facts and circumstances surrounding the transaction in advance and then speculate about how a court would view the arrangement in hindsight. Further, even where an initial fundraising sale of crypto assets can be safely categorized as a securities transaction, the treatment of the assets themselves is often much less clear. For example, it appears that the SEC’s view is that events that occur after the crypto assets have been initially sold (e.g., reliance on future efforts to upgrade a network or application, responses to an exploit, etc.) could impact whether the asset itself should be treated as a security, at least temporarily. The securities analysis of tokens has been further complicated by the SEC staff’s suggestion that a token’s status can “morph” from being a security to a non-security (and potentially even back again!).18 Projects like Hiro, discussed in Part II, and more recently Web3 Foundation (in respect of the Polkadot network’s native token, DOT), have publicly taken the position that their tokens were once investment contracts and therefore a security but are no longer.19 However, as previously discussed, there is currently no clarity as to when, if ever, it is appropriate to consider that a token has either become, or ceased to be, a security. b. If crypto assets are securities, what kind of securities are they? In addition to clarifying whether (or when) crypto assets are securities, the SEC must clarify what type of securities they are. The current SEC disclosure regime is designed for traditional corporate entities that generally issue equity and debt securities for purposes of raising capital. For example, Form S-1 requires issuers to determine whether the securities to be offered are equity or debt securities for purposes of evaluating the need to make certain disclosures.20 The SEC most commonly characterizes crypto assets as “investment contracts,”21 a term the Supreme Court defined broadly enough to encompass both equity or debt securities for registration statement purposes. Although the SEC staff has not provided formal guidance on the topic, it has indicated that some crypto assets that are investment contracts should be considered equity securities under Regulation C.22 However, some practitioners have pushed back on the SEC’s reasoning, arguing that the agency misreads the statutes.23 The distinction between equity or debt (or something else) is critical because it has many downstream effects for the entity deemed to be the issuer. For example, if the crypto assets that are investment contracts are deemed to be equity securities then the Section 12(g) registration requirements of the Securities Exchange Act of 1934 will apply. In addition, outside of the area of securities law, in the context of crypto assets that can earn a reward from staking or other activities, the distinction between equity and debt can affect the characterization of any income stream and their tax status. 5. Current disclosure requirements do not provide the right information about crypto assets Assuming that some crypto assets are considered securities and therefore subject to registration, the current SEC disclosure framework will need to be significantly adjusted and clarified in order to provide the market with the right mix of information about those crypto assets. a. What information about crypto assets is “material”? Issuers of registered securities are required to publicly disclose all “material” information related to an investment opportunity so that investors may make an informed decision. The Supreme Court has reasoned that information is “material” if such information would be reasonably viewed by an investor as significantly altering the total mix of information made available.24 And this. However, since the disclosure requirements of Form S-1 and Regulation S-K are tailored for offerings of securities by centralized corporate entities seeking to raise capital to run a business enterprise and, as we explained in Section 3, crypto assets differ fundamentally from this, the current disclosure requirements do not capture material information for crypto assets. In fact, the typical information required by securities laws could be misleading to crypto asset investors, who may believe that information is material simply because the SEC mandated its disclosure, when it is not. Moreover, some of the material information that crypto asset users and investors would want to know is publicly available to technologically sophisticated participants. Despite adding controversial disclosure requirements related to topics like climate change,25 the SEC has not provided any guidance with respect to the types of disclosures it views as material in the context of crypto assets that are securities. As a result, the question of what information would be relevant (or “material”) to purchasers has been left to ad hoc determinations by the sellers of these crypto assets. Nor has the Commission tailored a distinct registration statement form for crypto asset security offerings, as it has done for other types of securities.26 The need for this guidance was even acknowledged by Chair Gensler who noted that “it may be appropriate to be flexible in applying existing disclosure requirements,” and that “[t]ailored disclosures exist elsewhere — for example, asset-backed securities disclosure differs from that for equities.” In the subsections below, we analyze the current disclosure requirements that are inadequate with respect to crypto asset securities, as well as various missing disclosures. a. Current disclosure requirements are focused on information that is not material for owners of crypto assets i. Business and financial information Form S-1 and SEC Regulation S-K require the issuer to provide a detailed description of the issuer’s business and “revenue-generating activities, products and/or services,” along with audited financial statements.27 In addition, besides having to provide a full suite of audited (and, if applicable, unaudited interim) financial statements, registrants must include a highly detailed discussion of those financial statements known as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (or “MD&A”). While it may be possible for some sellers of crypto asset securities to provide such information, in many instances this information may not be particularly material and could wind up actually being misleading to purchasers. Unlike the typical initial public offering, a crypto asset security offering may be conducted by a seller with little to no operating history and no recent periods of profitable operations. Most importantly, assuming that the seller (or an affiliate) has completed the development of the crypto asset and associated blockchain network or application, the selling entity may not have any future business or revenue-generating plans that would be relevant to an initial or subsequent purchaser. Simply put, the original creators of crypto assets often have little relevance to the value of the asset being sold and only become less relevant over time. Information about the issuer’s ongoing business activities and financial statements may therefore not be material to investors on an ongoing basis. By contrast, investors will likely deem to be more material certain information about the network or application that is unrelated to the business of the selling entity and that is not contemplated by Form S-1 and associated disclosure regulations. The technical requirements of Form S-1 and Regulation S-X (as to financial statement information) may also present challenges for issuers that can result in purchasers being misled. For example, Regulation G requires issuers that present non-Generally Accepted Accounting Principles (“GAAP”) information to present the closest GAAP measure and a reconciliation. Since accounting standards like GAAP have not yet been updated to reflect the unique qualities of crypto assets, in practice this makes it very difficult to clearly present financial information that can be most relevant for disclosure. ii. Issuer and team information Form S-1 and Regulation S-K are tailored for securities offerings made by a single legal entity issuer with a traditional management structure. For example, the issuer is required to disclose biographical information for the executives,28 board of directors and certain other significant employees,29 along with their compensation and benefits, holdings in the company, and other information. However, as we have noted above, information related to the management of the legal entity deemed to be the “issuer” will often be less important in the context of crypto asset securities than it is for most other types of securities. Crypto assets are often launched by a distributed community that does not have a clear hierarchy or clearly defined bounds. In some extreme situations, the asset seller itself may dissolve and the team move on to do other things. In others, the original team will remain and continue working on the project, but over time purchasers may come to care more about third-party contributors who may not work on the project full time or have any formal relationship to the legal entity. It is not clear what level of disclosure would apply to these contributors. If covered by the disclosure obligations, they would not have the option of remaining anonymous, as is common today. iii. Use of proceeds Form S-1 requires the issuer to describe the registrant’s planned use of proceeds. However, crypto assets are often distributed in ways that do not accrue any direct proceeds to an “issuer.” For example, as mentioned above, the Ethereum blockchain programmatically distributes ether to validators that stake ether, but there is no centralized entity that receives proceeds in connection with these distributions. Additionally, it is common for crypto assets to be “air dropped” for free to users of an application or holders of a particular type of crypto asset. Moreover, the use of proceeds may not be determined by the issuer of the crypto assets and such proceeds may accrue to another person rather than the original seller, making it impossible for the seller to adequately disclose the relevant information in a registration statement. For example, it is common for a group of founders, who sometimes form development companies, to distribute a token and direct the proceeds to a community “treasury” (i.e., a blockchain address typically controlled by a “multi-sig” wallet typically by the vote of the tokenholders themselves. b. Missing disclosures In addition to focusing on information that is not relevant, current disclosure requirements also do not cover a number of features unique to crypto assets that would be considered material when making an investment decision. Since others have written extensively on the subject of disclosures for crypto assets, we only highlight some themes below.30 i. Governance While the current SEC disclosure framework focuses extensively on the corporate governance rights that the holders of securities have relative to an issuer, the disclosure framework completely misses the “governance abilities” that crypto assets have relative to their native protocols. As described above in Section 3(a), crypto assets largely derive their value and functionality on the basis of technological power they can exercise in a network. Understanding “governance” in the context of crypto assets therefore calls for different disclosures than in the context of securities.31 For example, it is critical for holders to understand the extent to which their token votes or other actions are self-executing or “on-chain,” as opposed to “off-chain”, relying on a legal or social enforcement mechanism. A tailored disclosure framework would also delve into how code upgrades can be implemented, including highlighting whether specific smart contracts are upgradeable and if so, which network addresses have the upgrade permissions and who controls those addresses. ii. Security While the SEC has enacted rules mandating public companies to disclose information related to cybersecurity risks and incidents, it has not provided any guidance for how these apply to crypto assets. Given the severity of the cybersecurity threat in crypto, a tailored disclosure framework that focuses on the unique security issues raised by crypto assets and networks is required to protect investors and users. For example, the developers could be required to disclose any code audits provided the related software documentation and accompanying commentary. In addition, any incentives for white hat hackers to submit bug bounties or perform rescues would be material. iii. Network or Application Design Unlike companies that offer stock or bonds, sellers of crypto assets are typically offering an asset associated with a blockchain network or application. Although most projects publish the open-source code associated with the network or application, most purchasers of crypto assets lack the technological sophistication to read and understand the code. Accordingly, purchasers of crypto assets are likely to be particularly interested to learn more about the technical design of the network or application in making a decision to purchase the crypto asset. Indeed, the blockchain network or application may continue on well after the issuer is no longer operational. iv. Tokenomics The “tokenomics” of crypto assets is highly material to investors but not currently covered by the disclosure requirements. For example, information including the initial allocation of the tokens, total supply of tokens and future issuance schedule can have material impact on a crypto asset’s value. v. Consumptive Use / Utility Securities are by and large passive investment instruments that cannot be used or consumed in the same way as a commodity or collectible. But crypto assets are generally designed to be used within a blockchain network or application. Accordingly, purchasers of crypto assets are likely to desire information related to how the crypto assets can be used - or the crypto assets’ “utility.” Very relevant. 6. Conclusion As we have shown above, the current securities framework was tailor-made to regulate fundraising by centralized legal entities issuing securities, such as a company selling shares to the public in its “IPO.” However, crypto assets differ fundamentally from securities and therefore raise different investor disclosure considerations. Unfortunately, the current SEC Chair and staff have failed to recognize the uniqueness of crypto assets and are instead engaged in a campaign to attempt to brute force crypto into an ill-fitting disclosure regime. This campaign will ultimately harm the same public the SEC is tasked with protecting. As Nobel prize winning economist George Akerlof argued in his seminal paper “The Market For ‘Lemons’”, the quality of goods in markets that lack disclosure standards and exhibit information asymmetries between participants degrade over time. Applied to the market for crypto assets, Akerlof’s theory shows how the SEC’s insistence on applying an ill-fitting disclosure framework to crypto assets will result in the quality of crypto assets degrading, with direct harm to users, investors and the market generally. While the SEC Chair’s repeated catchphrase that crypto projects must “come in and register” might make for a good soundbite, it is no substitute for thoughtful policy. In order to fulfill its mission, the SEC must radically change course and work with the crypto industry to develop tailored disclosure requirements that provide crypto users and investors with the information that they need. Notes Footnotes See Chris Brummer, Disclosure, Dapps and DeFi, Jun 29, 2022, Stanford Journal of Blockchain Law & Policy, available here, for the first published analysis of the ambiguities in the securities disclosure framework as applied to DeFi and Chris Brummer, Trevor Kiviat, Jai R. Massari, What Should be Disclosued in an Initial Coin Offering?, Dec. 17, 2018, available here, for the first published analysis of securities disclosures as applied to ICOs. These seminal pieces should be consulted by anyone interested in these topics. ↩ There are of course many other registration forms, including S-2 and S-3, F-1,F-2, F-3 and others. While our analysis below focuses solely on Form S-1, we believe the same arguments would apply to the rest of the registration forms, which share Form S-1’s general structure. ↩ SEC Commissioner Hester Peirce recently expressed her frustration with the SEC’s approach, noting that “[t]oday’s Commission tells entrepreneurs trying to do new things in our markets to come in and register. When entrepreneurs find they cannot, the Commission dismisses the possibility of making practical adjustments to our registration framework to help entrepreneurs register, and instead rewards their good faith with an enforcement action.” (Hester M. Peirce, Commissioner, SEC, “Rendering Innovation Kaput: Statement on Amending the Definition of Exchange” (Apr. 14, 2023) (statement), available here. ↩ Regulation C establishes the general requirements for the filing of a registration statement, including requirements related to proper form, incorporation by reference, confidential treatment, and submission to the SEC. 17 C.F.R. Part 230. ↩ Regulation S-K details the requirements for disclosing certain non-financial qualitative descriptors that issuers must include in the registration statement. 17 C.F.R. Part 229. ↩ Regulation S-X describes the requirements for the disclosure of financial statements in the registration statement. 17 C.F.R. Part 210. ↩ Lewis Rinaudo Cohen, Gregory Strong, Freeman Lewin, Sarah Chen, The Ineluctable Modality of Securities Law: Why Fungible Crypto Assets Are Not Securities (Nov. 10, 2022), available here. ↩ Smart contracts are immutable by default, meaning they cannot be removed or updated by anyone once deployed. It is possible for the smart contract’s developers to, prior to the smart contract’s deployment, include the ability to update its functionality. This ability to update functionality can be revoked by transferring the permissions for this ability to a “burn” Ethereum address for which there is no corresponding private key. This placeholder is known as “the zero address.” Once the ability to update a contract has been revoked, it cannot be reclaimed and the contract can no longer be changed. ↩ For example, MakerDAO, the community behind the stablecoin DAI, dissolved the foundation they relied on during the early stages of the project. ↩ See Proof of Stake Alliance, U.S. Federal Securities and Commodity Law Analysis of Liquid Staking Receipt Tokens (Feb. 21, 2023), available here. ↩ Nareg Essaghoolian, Initial Coin Offerings: Emerging Technology’s Fundraising Innovation, 66 UCLA L. Rev. 294, 304 (2019) (“Since Bitcoin is not backed by the trust of a central authority, its value is derived solely by market forces.”). ↩ Michael Selig, What If Regulators Wrote Rules for Crypto?, CoinDesk (Jan. 23, 2023), available here (“Crypto assets are network assets. Unlike firms, networks are generative. The value of a network derives from the applications, organizations and projects built on the network by its users.”). ↩ See FN 7 for more detail. ↩ House Financial Services Committee, Hearing Entitled: Oversight of the Securities and Exchange Commission, April 18, 2023, available here. ↩ See, e.g., CFTC Chair Rostin Behnam’s response to Senator Kirsten Gillibrand’s questions at the March 8, 2023 CFTC oversight hearing by the Senate Agriculture Committee where Chair Behnam made clear his view that ETH is not a security and that the CFTC would not have permitted a CFTC-regulated exchange to list an ETH futures product if ETH was a security. “I’ve made the argument that Ether is a commodity. It’s been listed on CFTC exchanges for quite some time and for that reason it creates a very direct jurisdictional hook for us to police obviously the derivatives market but also the underlying market as well … we would not have allowed the product, in this case the ether futures product, to be listed on a CFTC exchange if we did not feel strongly that it was a commodity asset.” ↩ See S.E.C. v. W.J. Howey Co., 328 U.S. 293 (1946) and Reves v. Ernst & Young, 494 U.S. 56 (1990). Outside of Howey and Reves, the SEC has argued that certain crypto assets meet the definition of “security” for other reasons. For example, in SEC v. Terraform Labs PTE Ltd., Case No. 1:23-cv-01346 (S.D. NY Feb. 15, 23) (complaint), the SEC argues that UST is a security because it is a right to purchase a security and wLUNA is a security because it is a receipt for a security. ↩ Strategic Hub for Innovation and Financial Technology, Framework for “Investment Contract” Analysis of Digital Assets (Apr. 3, 2019), available here (the “FinHub Framework”). The FinHub Framework expands the four prong Howey analysis into approximately fifty non-exhaustive factors, none of which is necessarily intended to be weighted more heavily than any other or to be dispositive as to security status. ↩ As former SEC Director of Corporation Finance William Hinman noted in public remarks, it is possible for a crypto asset to initially be offered and sold as a security because it is part of an investment contract, but later no longer be part of any investment contract (e.g., as a result of decentralization of the associated network or application). ↩ Web3 Foundation Announces Polkadot Blockchain’s Native Token (DOT) Has Morphed and Is Software, Not a Security, November 10, 2022, available here. ↩ The form requires issuers of equity securities to specify the dividend rights associated with each security and whether the issuer intends to pay cash dividends to holders (and, if the issuer has sufficient earnings to do so, the reason that the issuer does not plan to do so). Additionally, issuers of equity securities must outline the voting rights, liquidation rights, preemption rights, and sinking fund provisions associated with the securities, among other things. Importantly, the form assumes that the dividend, voting, and preemption rights are associated with the issuer legal entity rather than a blockchain network or DAO. Issuers of debt securities must provide disclosures with respect to, among other things, maturity, interest, conversion, redemption, amortization, sinking fund, and retirement. ↩ The SEC has also recently argued that certain crypto assets are securities under theories that such assets constitute a right to purchase a security, a receipt for a security and a security-based swap. (See, e.g., SEC v. Terraform Labs PTE Ltd., Case No. 1:23-cv-01346 (S.D.N.Y Feb. 16, 2023) (complaint). ↩ See, e.g., Blockstack Token LLC, Preliminary Offering Circular (Apr. 11, 2019), available here (although issuer noted that it does not believe that the tokens are equity or debt, issuer included disclosures typical of an equity security offering); INX Limited, Form F-1 (Aug. 19, 2019), available here (issuer expressly characterized tokens as equity securities). ↩ See Robert Rosenblum, Reading the Not-So-Subtle Tea Leaves: What the SEC is Likely to Do Next in Crypto, and How Crypto Participants Should Prepare (July 28, 2022), available here. (First, tokens that are securities because they are investment contracts under the Howey test usually lack traditional indicia of equity securities of the issuer of the tokens; the tokens generally provide the token holder with no right to dividends or other income from the issuer of the tokens, and they give the token holder no rights to vote for directors of the issuer or to vote on any other matters directly affecting the issuer. Second, most Howey tokens do not seem to come within the relevant definitions of “equity security.” Section 3(a)(11) of the Exchange Act defines the term “equity security’ to mean, in relevant part, “any stock or similar security.” Rule 3a11-1 under the Exchange Act contains a somewhat broader definition of “equity security,” including in pertinent part “any stock or similar security, certificate of interest or participation in any profit sharing agreement, preorganization certificate or subscription, transferable share, voting trust certificate or certificate of deposit for an equity security, limited partnership interest, interest in a joint venture, or certificate of interest in a business trust …” The list of instruments in Rule 3a11-1 is based on instruments described in the definition of security in Section 3(a)(10) of the Exchange Act. Notably, Rule 3a11-1 does not include in its definition of an equity security an “investment contract.” The term investment contract is, of course, listed in the definition of “security” in Section 3(a)(10), and its absence from the list of instruments in Rule 3a11-1 strongly suggests that investment contracts generally are not equity securities. Therefore, tokens that are securities solely because they are investment contracts do not appear to be equity securities under Rule 3a11-1, and the issuers of those tokens should not be subject to a Section 12(g) registration requirement with respect to those tokens.) ↩ Basic, Inc. v. Levinson, 485 U.S. 224, 232 (1988). ↩ See The Enhancement and Standardization of Climate-Related Disclosures for Investors, 87 Fed. Reg. 21334 (Apr. 11, 2022). ↩ The SEC has created special disclosure “schedules” for issuances of asset-backed securities and securities by companies in the oil and gas and the banking sectors as well as special rules for sales of securities by foreign governments, among others. ↩ This includes audited balance sheets as of the end of each of the two most recent fiscal years, or, if the issuer has been in existence for less than one fiscal year, an audited balance sheet as of a date within 135 days of the date of filing the registration statement. ↩ Executive officers include the president, any vice president in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy making function, or any other person who performs similar policy making functions for the issuer. ↩ Such significant employees include production managers, sales managers, or research scientists who are not executive officers but who make or are expected to make significant contributions to the business. ↩ Disclosure, Dapps and DeFi (3.24.2022) by Chris Brummer, LeXpunK Regulation X Proposal (4.25.2022) by Sarah Brennan, Andrew Glidden, Darren Sandler and Gabriel Shapiro and accompanying Safe Harbor X (1.8.2022) by Gabriel Shapiro, Token Safe Harbor Proposal 2.0 (4.31.2021) by SEC Commissioner Hester Pierce, What Should Be Disclosed in an Initial Coin Offering (11.29.2018) by Chris Brummer, Trevor Kiviat, Jai R. Massari ↩ Some projects have relied on offshore legal entities with governance mechanisms that are informed by tokenholders. For example, many projects have formed ownerless foundation companies in the Cayman Islands that have adopted charters requiring the foundation’s directors to take the recommendations of tokenholders, expressed via governance voting, into account and generally act in accordance with the recommendations of tokenholders. However, the “governance rights” that these tokenholders have vis-a-vis offshore entities are significantly more limited than the rights a shareholder enjoys vis-a-vis a related corporation and tokenholder votes generally are not legally binding on a foundation’s directors in the same way that shareholder votes are binding with regard to a corporation. ↩ Getting a startup off the ground involves preparing and filing a lot of documents and forms, most of which are relatively easy and straightforward. For example, a founder will have to file a certificate of incorporation with the Secretary of State’s office in order to form a new corporation. They will also need to file Form SS-4 with the IRS in order to get an employee identification number (EIN). While many founders work with lawyers on this process, it’s simple enough that they could do it themselves. As a result, thousands of U.S. small businesses are formed each day. SEC Chair Gary Gensler would like the American public to believe that it is just as simple and easy for crypto founders to register tokens or crypto products with the SEC. It’s not. Yet in a recent nationally televised interview, Gensler admonished crypto exchange Kraken over the company’s failure to register its staking product, which resulted in a settlement with the SEC pursuant to which Kraken had to pay damages and shut down the program. “These firms, Kraken knew how to register. Others know how to register, it’s just a form on our website,” he said, without providing further detail. “They know how to do it. They are just choosing not to do it,” he added later on. Gensler elaborated on his message in an opinion piece a few days following, lamenting that “Frankly, though, crypto intermediaries aren’t exactly lining up to register with the SEC and comply with the laws enacted by Congress. Maybe it’s simply that their business models rely on being noncompliant.” And yesterday, after years of failing to provide guidance or regulatory certainty to Coinbase, the SEC sent the Company a Wells notice. According to Coinbase, the SEC threatened the company for listing tokens it considered securities (but it won’t say which ones) without registering as a securities exchange and offering an unregistered staking product (but it won’t say how to register). Chair Gensler’s public comments and actions are self-serving in two ways: they attempt to justify an unconstitutional expansion of the SEC’s jurisdiction over crypto by wrongly implying that most crypto products and tokens are securities and should therefore register with the SEC, while also painting the crypto industry as composed of willful lawbreakers who actively chose not to follow simple rules and, like boundary pushing toddlers, are deserving of punishment by the SEC. Yet, even putting aside the question of whether securities laws apply in the first place, the “forms” representing the “clear” path for crypto projects to “comply” cannot be completed on Legal Zoom or DIY’ed with free online resources. For example, Form S-1, which is used by the most mature private companies when they want to go public or conduct an “IPO,” typically takes an army of lawyers and millions of dollars to complete. Here it is: try making sense of it yourself. In fairness to the Chair, he never explicitly said that filing a registration form would be easy or cheap. But his suggestion that crypto companies can register by “filling out a form online” fails for a much more straightforward reason: until the SEC adapts the registration framework to the unique aspects of digital assets, it is impossible to “come in and register.” The current registration forms rely on a set of disclosures that are inadequate for crypto’s unique aspects and leave investors vulnerable. Registration also entails a host of additional regulations for the token, the reporting company, and other participants in the ecosystem that makes the functioning of most crypto protocols impossible. Indeed, the reason there are virtually no registered token offerings in the US is because the SEC has failed to provide any actionable guidance, issue a single rule or constructively engage with anyone in the crypto industry to provide a workable regulatory framework for security tokens. The example of Coinbase is illustrative. An SEC registered company itself, Coinbase submitted a rulemaking petition to the SEC in summer of 2022 that asked for clarity regarding many unresolved issues needed for a functioning market in digital assets, including registration as an exchange and staking. That petition went unanswered. Instead, yesterday the SEC continued its pattern of regulation by enforcement by sending Coinbase a Wells notice covering activities the company was actively seeking clarity on through their public rulemaking. The claim that crypto projects can “just come in and register” with the SEC today is a fabrication - much more is needed from them if the SEC genuinely wants to provide appropriate investor protection in the crypto asset space. Our hope is that building consensus on the viability of crypto projects registering with the SEC under the current regime can spur a true, honest discussion about how this industry should be regulated, with Capitol Hill as the locus of engagement. That, and only that, offers the crypto industry, crypto skeptics, policymakers, interest groups, and the American public a path to addressing/regulating crypto. The grand bargain of the US securities laws is that any issuer selling securities to the general public must provide the public with a set of disclosures approved by the SEC. These laws are intended to address information asymmetry and ensure that the investing public has the material information necessary to make informed investment decisions. The securities laws are not intended to turn the SEC into a gatekeeper or “merit regulator” that itself decides which projects are investable and which are not. Congress meant for discretion to remain solidly in the hands of individual investors.1 According to this framework, whenever a crypto project is distributing tokens in a “securities offering,”2 it must be either registered with the SEC or comply with an exemption from registration. Most frequently, crypto projects rely on exemptions for private offerings made only to “accredited investors” or only to non-U.S. persons. However, there are four main paths to registering or qualifying a token offering that includes non-accredited investors under the Securities Act of 1933 (the “1933 Act”): a “mini-IPO” under Regulation A pursuant to Form 1-A3; offering under Regulation Crowdfunding pursuant to Form C4; a typical IPO by a domestic issuer on Form S-1; and an IPO by a foreign issuer on Form F-1. In order to register or qualify an offering, the issuer needs to fill out the appropriate form and submit it to the SEC with other documents, including typically 2 years of financial statements. The SEC will review the submission and provide comments which must be sufficiently addressed through written answers and subsequent amendments of the filed forms. Only after the SEC’s comments are fully addressed and the form is “effective” or “qualified” can the issuer begin to sell the securities.5 Even if the token distribution is exempt from the registration requirements of the 1933 Act, if the tokens are considered “equity” securities and the project meets certain minimum asset and holder requirements,6 they may also be required to register under the Securities Exchange Act of 1934 (the “1934 Act” and together with the 1933 Act, the “Securities Acts”) by filing Form 10. Form 10 is automatically effective 60 days after it is filed. However, the SEC can provide comments that need to be addressed to prevent the registration from being revoked. Many crypto projects are understandably concerned that, in exercising discretion when commenting on and approving registration statements (or not), the SEC could overstep its mandate and act effectively as a merit regulator, depriving the public from their ability to choose their own investments. But the SEC’s job is to ensure adequate disclosure of securities opportunities for investors, not to decide what investors can invest in. That power remains entirely with the American people. Look at that. In addition, most SEC registration forms reference yet other SEC regulations, most notably Regulation S-K and S-X, which provide for a wide variety of specialized disclosures. There are also “schedules” for registrants in certain industries, such as oil & gas and banking, to address the unique elements of those industries. There are even special rules for issuers of asset-backed securities, excepting these issuers from some requirements applicable to “traditional companies” and adding other disclosures. But has the SEC done the same for companies working on crypto projects? No. 2. What obligations do SEC registered projects have? Registration is not a “one and done” process. When a project registers a token it will also become a publicly-reporting company that must file annual, quarterly, and current reports, and become subject to the proxy, tender offer, Sarbanes-Oxley, and a host of other rules.7 Once a project has registered a token, either under the 1933 or 1934 Act, that token will only be able to trade on a National Securities Exchange, Alternative Trading System (“ATS”), or by brokers OTC.8 In addition, many intermediaries dealing with the token will be subject to onerous regulation. However, as stated by Coinbase in its petition for rulemaking, “The U.S. does not currently have a functioning market in digital asset securities due to the lack of a clear and workable regulatory regime.” This is because tokens that register as securities would not be tradeable on existing crypto exchanges, none of which are registered as a national securities exchange. But there are also no registered national securities exchanges that can trade tokens and a limited number of ATS that effectively have no meaningful secondary liquidity. But more fundamentally, the current regulations are incompatible with disintermediated trading. On the rare occasion the SEC lets a token project legitimize through registration, that token lands in a world lacking the infrastructure necessary to trade it. Specifically, the SEC has refused to license intermediaries such as broker-dealers and exchanges. As a result, the restrictions on the secondary market trading of tokens registered as securities will severely hinder if not totally impede the operation of most crypto projects. The SEC has created a world where project founders are required to register as ice cream, while making freezers illegal. Good luck! Crypto projects seeking to register tokens or other products will also face a daunting process. Despite the substantial time and extraordinary costs incurred by the few projects that have attempted registration, these projects have arguably been unable to operate their businesses while complying with the securities laws, or have operated their businesses at a significant disadvantage to others in the market who operate without registration and with no adverse regulatory consequences. In the sections that follow, we will provide an overview of the tokens that have attempted to register with the SEC.9 3. ICO era enforcement actions The earliest attempts at registering tokens under the Securities Acts came as a result of settlements relating to SEC enforcement actions. Six projects that conducted ICOs starting in 2017 — CarrierEQ Inc. (dba ”Airfox”), Paragon Coin, Inc., Gladius Network, Blockchain of Things, Inc., Enigma MPC and Salt Blockchain Inc. — were each charged by the SEC with undertaking an unregistered offering and sale of securities.10 In order to settle the changes, each of the projects agreed to repay investors, to register their respective tokens as a “class of securities” under the 1934 Act by filing Form 10 and to comply with ongoing reporting obligations. a. How have those projects fared? At the time, the SEC hailed the settlements as “a model for companies that have issued tokens in ICOs and seek to comply with the federal securities laws” and argued the settlements represented “a path to compliance with the federal securities laws going forward, even where issuers have conducted an illegal unregistered offering of digital asset securities.” The SEC even declined to impose additional penalties on each of the projects to account for their respective “remedial” actions, including their commitment to register the tokens as securities. Yet one can argue the SEC’s requirement that these companies register their tokens was not meant to provide an avenue for the projects to continue operating as reporting companies – it was intended only to euthanize them. Registration was used as a tool to assist in the rescission process pursuant to which the companies had to pay back the original token purchasers. In hindsight, it’s no surprise that despite the SEC’s initial enthusiasm, out of the six projects that were required to register their token, five are no longer operating in the US or reporting to the SEC and none of the six tokens has any meaningful utility or market. These examples reveal that the SEC’s suggested “path to compliance” was really an ascent to the afterlife. And while some might dismiss this as worthy punishment for projects that conducted unregistered offerings, it reveals the impossibility of complying with the current SEC regime.A former SEC enforcement lawyer was even quoted at the time saying the SEC’s settlement model was “impractical.” Perhaps recognizing this fact, the SEC has largely since stopped requiring projects to register as part of settlements for unregistered offerings of securities.11 Airfox Airfox was a Massachusetts-based start up that, between August and October 2017, raised $15 million through its ICO of “AirTokens.” The company entered into a settlement with the SEC on Nov. 16, 2018, that included the obligation to register the AirTokens by filing a Form 10 within 90 days. Nearly 4 months later, on March 15, 2019, Airfox filed its Form 10, which became automatically effective on May 14, 2019, making AirTokens the first token to be registered with the SEC on Form 10. However, Airfox’s Form 10 had to be subsequently amended four times in order to respond to SEC comments. While Airfox initially complied with its obligation to register the AirTokens and make ongoing disclosures, the company was forced to pivot away from their token and in May 2020 was acquired by a Brazilian retailer. In a current report filed on Form 8-K, the company noted it would discontinue the development of AirTokens because “[c]urrent laws and regulatory regimes do not provide for the Company to utilize the AirTokens as envisioned by the Company…” Since then, the company has stopped operating in the US and the AirTokens have had no liquidity. The token is effectively dead. Paragon Paragon Coin Inc. (“Paragon”) was a Delaware company that raised $12 million from their 2017 ICO of “PRG Tokens” as part of a scheme to integrate blockchain technology to the cannabis industry. Paragon also entered into a settlement with the SEC on the same date and on substantially the same terms as Airfox, including the requirement to register the PRG Tokens on Form 10 within 90 days. On March 29, 2019, more than 4 months after the settlement, Paragon Coin filed its first and only Form 10 registration, which became automatically effective 60 days after. However, the company failed to answer an SEC letter with dozens of follow-up questions, or amend the registration or provide any additional disclosures. According to reports, in April 2020 Paragon announced that it was filing for bankruptcy and ceasing operations, noting that its “plans were impossible to achieve due to several legal mistakes”. On March 9 of this year, the SEC officially revoked the registration of the PRG tokens. There is also no market in the PRG Tokens. This project is dead. Gladius Gladius Network LLC (“Gladius”) was a Nevada company that was developing a network that allowed participants to rent out spare bandwidth and storage space. The company raised ~$12.7 million pursuant to its 2017 ICO of “GLA Tokens.” On February 20, 2019, Gladius also entered into a settlement with the SEC that required it to register the GLA Tokens on Form 10 within 90 days. The Gladius settlement order included an additional provision stating that the company may later choose to file a Form 15 to de-register the GLA Tokens.12 The reference to Form 15 supports the view that a crypto asset may initially be offered and sold as part of an investment contract but later (e.g., as a result of sufficient decentralization) no longer be part of any investment contract. However in Gladius’ case, the company didn’t even file any Form 10 registration statement as agreed to in the SEC settlement, nor did it reportedly pay back any of the tokenholders, opting to dissolve instead. This project is dead. Blockchain of Things, Inc. Blockchain of Things, Inc. (“BCOT”) was a NY-based corporation that, from December 2017 through July 2018, raised more than $12 million from its sales of “BCOT Tokens.” On December 18, 2019, the company entered into a settlement with the SEC pursuant to which it agreed to register the BCOT Tokens under Form 10 within 120 days. In June 2020, BCOT filed its initial Form 10 registration, which it had to subsequently amend. While BCOT temporarily complied with its ongoing reporting obligations, in March of 2023, it announced that it was ceasing operations and liquidating. In connection with the wind down, the company filed a Form 15 to de-register the BCTO Tokens, which is the first and only time tokens have been de-registered, albeit in the contest of a dissolution not a project decentralizing. This project is dead. Enigma MPC Enigma MPC (“Enigma”) is a Delaware corporation that raised ~$45 million by selling “ENG Tokens” in the summer and fall of 2017. On February 19, 2020, the company entered into a settlement with the SEC that required the company to register the ENG Tokens using Form 10. Like others before it, the company initially complied with the settlement obligations and filed a Form 10 registration statement, which it subsequently amended three times in response to SEC comments. However, the company stopped making any disclosures after May 31, 2021, and is currently in an administrative proceeding for being delinquent on its reporting. The ENG Token has virtually no liquidity. This project appears to be comatose at best. Salt Blockchain Inc. Salt Blockchain Inc. (“Salt”) is a Colorado based corporation that operates a lending business that allows borrowers to obtain US-denominated loans collateralized by digital assets. During a period beginning in August 2017 and ending in August 2019, Salt raised ~$47 million from its sale of “Salt Tokens.” On Sept. 30, 2020, Salt entered into a settlement with the SEC that included an obligation to file a registration statement on Form 10 within 120 days. In May 2021, Salt filed its initial Form 10, which was subsequently amended four times in response to SEC comments. While Salt is an exception amongst the group given that it is still operating in the US, the Salt Token itself seems to have been largely deprecated and has almost non-existent liquidity. Despite this, the company has not filed a Form 15 to deregister the token, meaning they are subject to the burden of ongoing disclosure despite the token having no real utility. Reg A offerings The next wave of attempts at “compliant” token offerings were done as “mini-IPOs” under Regulation A promulgated under the 1933 Act (“Reg A”). Reg A offerings are technically exempted offerings as opposed to registered offerings, yet relevant to the discussion as they provide a potential alternative for regulated token distributions. As we will see, however, Reg A did not turn out to be a viable path either. Reg A was updated by the JOBS Act in 2012 to provide an alternative for small companies to raise from unaccredited investors using “slimmed down” disclosures as compared to a traditional IPO on Form S-1. Those wishing to conduct a Reg A offering must draft an Offering Statement including the information required on Form 1-A, file it with the SEC and address any comments before getting “qualified.”13 If the issuer is conducting an “ongoing offering,” it must continuously update the Offering Statement to ensure it always contains all material information about the company, the platform, and the tokens. In cases where there are fundamental changes to information in the qualified Offering Statement, the SEC will review and approve the amendment. As described below, this obligation to update the Offering Statement on an ongoing basis can cause significant friction for crypto projects which typically iterate on product quickly and therefore will need to constantly amend their disclosures. Reg A issuers also have ongoing reporting requirements. Although these disclosure obligations are less burdensome than those required after a fully registered offering, they nonetheless result in material ongoing costs to the token issuers. In addition, a significant challenge for Reg A token offerings is the lack of secondary markets, as the tokens must trade on SEC registered trading venues, none of which are workable options today. When the Reg A offerings of Hiro Systems PBC (f/k/a Blockstack PBC, “Hiro”) and YouNow (each described below) were qualified in 2019, some argued that Reg A was a ”potential solution” to regulated token distributions.14 However, as described in more detail below, Reg A offerings did not turn out to be a viable option, partly due to the prohibitively high costs, the restrictions with trading the tokens, and the burden of disclosure obligations. This pathway has also led to a dead-end. With four years of hindsight, the assessment from those same commentators was stark. The lead lawyer for both Hiro and YouNow recently noted that “To date, the SEC still has not adopted a single rule with which to govern crypto, has not amended a single disclosure or registration form to reflect the unique aspects of crypto, and has not created a workable process by which digital asset issuers can register their tokens for public sale or trade those tokens in a liquid secondary market.” Hiro On July 10, 2019, the SEC qualified the first Reg A token issuance. Hiro’s $40 million offering of “Stacks Tokens” structured as a “Tier 2” Reg A offering reportedly cost the company $2.8 million in fees and took over 10 months to prepare. In addition to being the first, the most remarkable aspect of Hiro’s Offering Circular was that it laid out the company’s long-term plans for decentralization, noting that its “ultimate goal is that the evolution and development of the Blockstack network become independent of [Hiro].” Therefore, Hiro noted that while it was treating the Stack Tokens as securities “for the foreseeable future,” its Board would be “responsible for regularly considering and ultimately determining whether the Stacks Tokens no longer constitute securities.” In other words, Hiro had registered the Stacks Tokens as securities out of an “abundance of caution,” but from day one aspired for the tokens to “morph” into non-securities, at which point Hiro would no longer be responsible for their registration. In keeping with this framework, in January 2021, Hiro’s Board voted to “no longer treat the Stacks Tokens as investment contracts that are securities under the federal securities laws.”15 As a result, Hiro would no longer be required to file reports pursuant to Reg A. In making this critical determination, Hiro’s management and Board relied on a legal opinion from Wilson Sonsini, a summary of which was made publicly available. Despite Hiro’s self-declaration that the Stacks Tokens were no longer securities, the SEC never formally weighed in. And it’s not clear the SEC agrees with Hiro’s position. In its latest annual report, Hiro disclosed that it “is responding to an inquiry from the Division of Enforcement” related to its decision to no longer treat the Stacks Tokens as securities. While the SEC staff guidance has stated that the analysis of whether a digital asset represents an investment contract (and thus, a security) may change over time, it has failed to provide any bright line rule or further clarification as to the mechanics of tokens “morphing” from securities to non-securities. Therefore, until the SEC clarifies the point of “transformation,” other token issuers considering a Reg A token distribution will face similar uncertainty as to the status of their tokens as securities. Hiro’s Offering Circular also acknowledged the limitations on the secondary market for registered tokens, noting that “there may not be a trading market available for the Stacks Tokens, or any digital token exchange on which holders of Stacks Tokens may transfer or resell their Stacks Tokens… As a result, the tokens may initially only be traded on very limited range of venues, including US registered exchanges or regulated alternative trading systems for which a Form ATS has been properly submitted to the SEC.” The disclosure continues by noting that “As far as we are aware, there are currently no national securities exchanges or exchanges that have been approved by the [FINRA] or registered under Form ATS with the SEC… to support the trading of Stacks Tokens on the secondary market.” YouNow - Props Also in July 2019, just a few days after the qualification of Hiro’s Reg A offering, the SEC qualified the Reg A Offering Circular of YouNow, Inc. (“YouNow”), which allowed the company to distribute up to $50 million worth of Props Tokens (“Props”) as part of its loyalty rewards program. Despite reportedly spending over 2 years working with the SEC to get the Props offering qualified, in August 2021, YouNow announced that “given the regulatory constraints” they no longer had a “viable future.” In particular, YouNow pointed to its obligation to update disclosures on an ongoing basis and the lack of a secondary market for its tokens as the reasons it was shutting down, explaining that: “Props Tokens’ status as qualified securities significantly limits our ability to respond to changing market conditions in a commercially feasible manner. The Reg A+ continuous offering environment in which we operate requires us to make public filings and often get prior regulatory approval for product changes. As a result, we are unable to follow anything remotely like proper product development of “launch, measure, iterate” and struggle to launch new key functionalities we develop (like staking or per-app tokens). In addition, although we submitted to the regulation of Props Tokens as qualified securities, no U.S. exchange has been able to list crypto assets such as the Props Token, which has hindered holders wishing to trade them.” According to YouNow, these regulatory restrictions meant that the company had “not been able to develop Props Tokens in ways that could lead to commercial success, and there is no reasonable prospect of that happening in the future, given the regulatory framework.”As described by CoinDesk at the time, “The news certainly puts a damper on the viability of Reg A for token founders looking to build the next-generation web powered by crypto. Ceres Since the SEC’s qualification of Hiro and YouNow in the summer of 2019, there has only been one other Reg A token offering qualified by the SEC. After responding to elevent rounds of SEC comment letters and amending their Offering Circular five times over a period of over two years, Ceres Coin LLC (“CERES”) had its Reg A offering qualified on March, 2021.16 As described in its Offering Circular, CERES intends to develop a private blockchain to enables participants in the cannabis industry to transact more efficiently. However, the company has yet to finalize the development of the private blockchain or issue any tokens and has to date recorded no revenue. 5. The History of Attempted Registrations Show it is Not Currently a Viable Path Recounting the history of crypto projects that have tried to register their tokens with the SEC is like taking a walk through a cemetery. As we have shown in the case studies above, the projects that attempted to come into compliance with the SEC’s registration requirements expended great effort and resources yet ultimately most of them failed, and those that persist do so in a state of uncertainty and comparative disadvantage. The failure of projects that have attempted to register is due in large part to the SEC’s reluctance to provide a workable framework through rulemaking, exemptive relief, guidance and industry engagement. Instead, the agency’s preferred approach has been to engage in a highly publicized campaign of regulation by enforcement. A prime example of the agency’s dangerous approach to the industry is their recent decision to threaten Coinbase with a wells notice, reportedly over the exchange’s failure to register. The SEC chose to take this path despite Coinbase repeatedly asking for clarity on how it could register, including by filing a public rulemaking petition and meeting with the staff over 30 times in the preceding nine months. In the forthcoming Part III of this series, we will further analyze why the applicable disclosure regime is not fit for purpose when applied to crypto, focusing on Form S-1. Part IV will then underscore how the SEC’s current position represents in practice a ban of the industry that exceeds the agency’s authority. Special thanks to Mike Selig for his review. Footnotes Chair Gensler has acknowledged that “We’re not a merit-based regulator primarily, we’re primarily a disclosure-based regulator and that’s the basic bargain. The public gets to decide what risk they want to take.” See A Fireside Chat with SEC Chair Gary Gensler. ↩ We believe most token offerings would not qualify as securities offerings and in the event that they do, the “investment contract” transaction should not be confused with the token, which is the underlying object of that transaction. See Lewis Cohen et at, The Ineluctable Modality of Securities Law: Why Fungible Crypto Assets Are not Securities, as well as our amicus briefs in the Ripple and Wahi cases. ↩ Reg. A offerings are technically not a registered, but an exempted, offerings. However, we include them in our analysis as they are an alternative path to offering tokens to the public. ↩ In a Regulation Crowdfunding offering, issuers will only be able to issue up to $5m worth of tokens in a twelve month period. ↩ The issuer will have limited ability to make “offers” before the registration statement is effective ↩ $10 million of assets and has at least 500 non-accredited or 2,000 total holders of record of those equity securities. ↩ Projects that qualify an offering under Reg. A will be exempt from 1934 Act reporting requirements so long as they comply with Reg. A’s own reporting requirements, which are a similar but streamlined version. ↩ Securities issued as Reg CF offerings must trade on Crowdfunding Platform. ↩ We are limiting our discussion to crypto-native tokens that have attempted to register and not discussing the registration tokenized securities such as the INX Token or certain tokenized funds, as those offerings raise different issues. ↩ Importantly, none of the charges included allegations of fraud. ↩ See, e.g., the SEC’s settlement with Block.one, which raised $4.1 billion, which is orders of magnitude more than the ICO issuers that were required to register. ↩ Specifically, the Gladius order noted: “If Respondent plans to file a Form 15 to terminate its registration pursuant to Rule 12g-4 under the Securities Exchange Act of 1934 on the grounds that the GLA Token no longer constitutes a “class of securities” under Rule 12g-4 because the GLA Token is no longer a “security” under Section 3(a)(10) of the 1934 Act, Respondent will notify the Commission staff at least thirty (30) days prior to such filing. Upon such notification, the Commission staff may make reasonable requests for further information, and Respondent agrees to provide such information, as applicable.” ↩ There are two “tiers” of Reg A offerings: Tier 1, which is capped at $20 million in a 12-month period; and Tier 2, which is capped at $75 million in a 12-month period. Amongst other differences, issuers in Tier 2 offerings are not required to register or qualify their offerings with state securities regulators, which can provide meaningful relief for projects looking to offer their tokens to all Americans. ↩ A WSJ article at the time framed it in these terms: “The Securities and Exchange Commission on Wednesday cleared blockchain startup [Hiro] to sell bitcoin-like digital tokens, a first-of-its-kind offering that could give young cryptocurrency businesses a new fundraising template.” ↩ Hiro is no longer in the position of providing, and will no longer be able to provide, essential managerial services to the Stacks Blockchain. Management concluded further that if Hiro is no longer in the position of providing, and will no longer be able to provide, essential managerial services to the Stacks Blockchain, then it is no longer necessary for Hiro to treat the Stacks Tokens as investment contracts that are securities under the federal securities laws. ↩ Chair Gensler’s nomination was pending before the full Senate in March 2021, and he was confirmed by the Senate in April 2021. While there is only one SEC Chair at a time, Acting Chairs traditionally keep nominees for SEC Chair abreast of key decisions leading up to their confirmation and avoid taking major actions without the tacit approval of the incoming Chair. ↩ I look forward to your published analysis of the interplay between the proposed rule and these concepts.