No one ever confused SEC Chairman Jay Clayton for a daredevil. He didn’t spend his youth bungee jumping, drag racing, or venturing to the deep end of the neighborhood pool. He is the staid, strait-laced embodiment of the Machine: the credential-and-prestige obsessed cabal of East Coast lawyers and fancy-degreed personages that land each year at name-brand federal agencies to pilot the American economy while disclaiming responsibility for the results.
Increasingly those who did jump (literally and figuratively) into the deep end—the risk-taking disruptors creating the new American economy—are complaining about Mr. Clayton’s stifling edicts. Circle founder and CEO Jeremy Allaire recently laid off 10% of his workers blaming “an increasingly restrictive regulatory climate in the United States.”
A more cautious group, those too scared to use their own names are also panning Shallow-End Jay. After quoting several anonymous sources, Crowdfund Insider recently declared, “Some people believe that Chair Clayton simply wants to dodge a bullet and exit before the next election cycle hits in full force. He would prefer to end his tenure at the SEC minus any major catastrophes, imaginary or not.”
So the future of the U.S. economy may be stalled so Shallow-End Jay can ensure he has the best possible post-SEC landing spot. Why settle for the sticky, dirty U. Penn when Harvard may call?
Reg CF, which crossed year three this month is one area where SEC paralysis is blatant.
Reg CF was supposed to revolutionize small-business capitalization. President Obama described it as a “game changer” when he signed the JOBS Act into law seven years ago. For the first time, the potential for massive returns would be available to everyone, not just a network of venture capitalists and investment bankers.
On the surface Reg CF seems to be performing swimmingly:
- Total Commitments: $217,383,649 raised since May 2016
- Total Investors: 234,883
- Total Campaigns: 1,640
- Average Raise: $219,382
- Jobs Supported: 8,690
But in reality, it’s sinking. And the weights limiting its buoyancy are manifest and known within the trade media, the SEC, and the broader government.
In March 2017, Edward Knight, Executive Vice President and General Counsel of NASDAQ testified:
From the outset the SEC’s view of [Reg CF] was they were not for this they and made it, shall I say, needlessly complicated and did not approach it except as this this was something where the public is going to get harmed and we need to narrow it as much as possible.
Six months later the U.S. Treasury recommended several improvements, thus far neither the SEC nor Congress has acted.
But help may be on the way. Corp Fin’s Bill Hinman recently acknowledged Reg CF’s shortcomings. Apparently, the SEC will soon publish its own Reg CF (and Reg A+) recommendations to increase their vitality and by doing so expand investment opportunity and brighten economic outlook. The SEC can juice Reg CF with little effort. According to Mr. Hinman some of these reforms are on the SEC’s radar:
- Raise the limit from the nonsensical $1.07M
- Increase individual limits
- Remove the limit for accredited investors
- Relax the solicitation rules
- Allow Special Purpose Vehicles
- Allow CEOs to sign off on financial statements
These fixes would have a tremendous impact on Reg CF and still provide Shallow-End Jay a soft landing at the Harvard of his choice.
Americans’ concerns abound. Will they get that raise? How are their kids doing in school? Is that ransomware email claiming recorded porn watching real? But one concern tops the rest. What is Securities and Exchange Commission ‘Senior Advisor for Digital Assets and Innovation’ Valerie Szczepanik, aka NPC Valerie, doing for her taxpayer-funded quarter-million dollar salary, benefits, cross-country junkets, and pension? The question on everyone’s mind has now penetrated the SEC’s highest levels via Commissioner Hester Peirce, aka Crypto Mom.
Ms. Szczepanik is a card-carrying member of the ‘Machine’: the credential-and-prestige obsessed cabal of East Coast lawyers and fancy-degreed personages that land each year at name-brand federal agencies to direct the American experiment while disclaiming responsibility for the results. These personages don’t do anything. They exist to build media profiles, attend conferences, banquets, other soirees on the taxpayer dime.
Boredom or dollar signs eventually shunt most to an NGO, nonprofit, white-shoe law firm, lobbying shop, or other influence-peddling post.
No one questions any of this. Since the New Deal, it’s been the price the intellectual class has imposed on the rest of us for the privilege of being Americans. But given the stakes and potential blockchain and digital currencies proffer, some have grown annoyed with SEC Machine protocol. Crowdfund Insider a house organ for Machine securities lawyers recently criticized Chairman Jay Clayton’s leadership, most, of course, in anonymous poltroonery.
As someone more concerned with the U.S. economy than state dinners, Crypto Mom’s criticism is more weighted, and admirably, name adorned.
In describing the SEC’s crypto Rube Goldberg guidance, she aims straight, even at NPC-in-charge, Ms. Szczepanik. She also skewers the Commission’s years-long refusal to approve any Reg A+ token sales. Her plain English comments, lacking hide-the-ball cant surely had SEC staff scrambling for their google translators to decode her message:
The SEC staff recently issued a framework to assist issuers with conducting a Howey analysis of potential token offerings. The document is a thorough 14 pages. It points to features of an offering and actions by an issuer that could signal that the offering is likely a securities offering. If this framework helps issuers understand what the different Howey Factors might look like in an ICO context, it may be valuable. I am concerned, however, that it could raise more questions and concerns than it answers.
While Howey has four factors to consider, the framework lists 38 separate considerations, many of which include several sub-points. A seasoned securities lawyer might be able to infer which of these considerations will likely be controlling and might therefore be able to provide the appropriate weight to each. Whether the framework gives anything new to the seasoned securities lawyer used to operating in the facts and circumstances world of Howey is an open question. I worry that non-lawyers and lawyers not steeped in securities law and its attendant lore will not know what to make of the guidance.
Pages worth of factors, many of which seemingly apply to all decentralized networks, might contribute to the feeling that navigating the securities laws in this area is perilous business . . .
On the accompanying TurnKey Jet No-Action Letter
This transaction is so clearly not an offer of securities that I worry the staff’s issuance of a digital token no-action letter—the first and so far only such letter—may in fact have the effect of broadening the perceived reach of our securities laws. If these tokens were securities, it would be hard to distinguish them from any medium of stored value. Is a Starbucks card a security? If we are going that far, I can only imagine what name the barista will write on my coffee cup
And yet, the staff’s letter did not stop at merely stating that the token offering would not qualify as a securities offering, but highlighted specific but non-dispositive factors. In other words, the letter effectively imposed conditions on a non-security . . .
I do not believe there was anything gray about the area in which TurnKey planned to operate, but issuing this letter may give the false impression that there was.
On the lack of SEC approval for a Reg A+ token
Unlike a private offering, however, a Regulation A offering must be qualified by the SEC before the issuer can begin raising money. Although several companies seeking to issue tokens have begun the process, none has yet had its Regulation A offerings qualified. The lack of progress is not only difficult for the companies that remain in limbo, unable to move forward with raising capital, but also may scare off other companies. These companies may opt for a private offering instead, depriving the general public of the opportunity to invest, and also depriving the market of the public disclosure of the information included in the Regulation A offering materials
It would be nice to think Crypto Mom’s criticisms will spur some paradigm shift in SEC protocol. But that is as likely as the Commission declaring itself a separate country. Crypto Mom’s name came from her distinct stances. And even another three commissioner-level crypto moms would have to battle—directly or discreetly—the hordes of NPC Valeries roaming the Commission’s austere halls. Staff controls most chores because little jumps to commissioner level and still less gets to Congress. For now, we must hope Crypto Mom continues Crypto Momming and some crypto dust infiltrates Commission thinking. One can hope.
Last year I wrote a post titled Finishing up Year Two as an Entrepreneur. I’ll expand on this each year as the lessons I learn multiply.
Here are four things I’ve learned about running a business this past year:
- Success is an indicator you need to work harder. I’ve experienced my first breakthrough this year. It proves my model can work and is reassurance the lean times were bringing me towards something better—although to be sure, there have also been setbacks. Success should nourish your higher goals, not be an end in itself.
- Don’t go chasing waterfalls. If potential clients don’t sign within three months, it’s likely not going happen and the opportunity cost isn’t worth it. That doesn’t mean they won’t eventually sign, some will as they just need more time. But many won’t, although they seem interested, they may lack the intangibles necessary to complete a successful crowdfunding campaign and it’s better for both parties to move on.
- Everybody is self-interested, but there must be more. The world runs on self-interest whether you work for yourself, a major corporation, a nonprofit, or the government. Unlike some sectors, business owners constantly get opportunities for partnerships, ally-ships, and cooperation with others within or outside their field. But if your only interest is how you benefit, it becomes obvious and results in a quick eyeroll/smirk combo. I’ve experienced more of this than I suspected. Caring and looking for ways to help others’ success comes back around eventually.
- Networking events are for networking. For us natural introverts, networking events can be stressful; lots hanging out by the refreshments and mindlessly checking our phones. Realizing most people are also experiencing some level of anxiety and are there for the same purpose can ease stress levels. The moments of initial awkwardness pass. You’re there to make connections, get leads, and expand your network. Take a deep breath and do it. Spending 15 minutes setting expectations and goals for yourself beforehand can get you in the right mindset to capitalize on your opportunity, which is what a networking event is.