From ‘Meh’ to ‘Don’t Tase Me Bro,’ ICO legal advice

Last week’s virtual currency hearing by the Senate Banking, Housing and Urban Affairs Committee frenzied the always-excitable crypto-crowd. The legal world was no different. Legal Eagles watched closely as SEC Chair Jay Clayton and CFTC Chair Chris Giancarlo testified.

One takeaway was the SEC’s strident view that Initial Coin Offerings (ICOs) are securities. As Clayton explained, “From what I’ve seen ICOs are securities offerings they are interests in companies much like stocks and bonds under a new label.”

That the SEC considers ICO tokens securities isn’t new. Clayton has stated so in op-eds, speeches, and bulletins.

Parcel with this stance is Clayton’s rebuke of derelict “market professionals.”

From the hearing:

  • Many ICOs are being conducted illegally, their promoters and other participants are not following our securities laws. Some say this is because the law is not clear I do not buy that for a moment.


  • A note for professionals in these markets, those who engage in semantic gymnastics or elaborate structuring exercises in an effort to avoid having a coin be a security are squarely within the crosshairs of our enforcement division.


  • I don’t think the gatekeepers that we rely on to assist us in making sure our securities laws are followed have done their job.

Clayton sounded the same theme in a recent speech:

  • First, and most disturbing to me, there are ICOs where the lawyers involved appear to be, on the one hand, assisting promoters in structuring offerings of products that have many of the key features of a securities offering, but call it an “ICO,” which sounds pretty close to an “IPO.”  On the other hand, those lawyers claim the products are not securities, and the promoters proceed without compliance with the securities laws . . .


  • Second are ICOs where the lawyers appear to have taken a step back from the key issues – including whether the “coin” is a security and whether the offering qualifies for an exemption from registration – even in circumstances where registration would likely be warranted.


  • I have instructed the SEC staff to be on high alert for approaches to ICOs that may be contrary to the spirit of our securities laws and the professional obligations of the U.S. securities bar.

His remarks led some to speculate the SEC has unpleasantness awaiting lawyers who gave faulty advice.

Lawyers advising ICOs have had two views about SEC warnings: “Meh” and “Don’t Tase Me Bro.”

  1. Meh

The SEC’s first declared ICOs securities last July via the defunct ‘DAO’ project. DAO had been a hotly debated (and eventually hacked) ICO.

Later that year the SEC stopped the Munchee ICO; the company returned all funds for clemency. Both projects had relied on a “utility token” defense. Essentially the tokens bought network protocol access and thus escaped the SEC’s amibt. In the Munchee order, the SEC addressed this argument: “even if MUN tokens had a practical use at the time of the offering, it would not preclude the token from being a security.”

Despite the warnings, some ICOs continue to use the utility defense.  

Singular DTV is an entertainment platform that raised $7.5 million in 17 minutes in 2016. When the SEC’s DAO report emerged, the company took a devil-may-care stance, welcoming the ruling but insisting it didn’t affect them.

SNGLS tokens weren’t securities because they had utility. And anyway the company proudly boasted it had spent “large sums of money” on various law firms and lobbyists in Washington to “advise and educate” policy makers. SEC definitions, it proclaimed, were “antiquated.”  “Today is a new world. We in the center of the cryptosphere know it and of course the SEC knows it. We’re looking forward to a more progressive policy being instituted in the coming years by US regulators.”

Those well-paid lawyers may care more after last week.

Lawyers for BlockMason are even more combative. They insist BlockMason sold utility tokens and distinguish them from Munchee through marketing strategy and network-protocol maturity.

Nonetheless, Mason’s legal team acknowledges it may be in trouble and thus warned the SEC any attack would contravene Supreme Court precedent. “Ambiguities in the SEC Munchee order and the SEC Chairman’s statement leave open the theoretical possibility that they could find any and every ICO token to be a security based on the mere fact that some purchasers bought tokens expecting to profit from a rise in the token value over time. If the SEC were to take such an extreme position, it would create severe tension with Supreme Court precedent and invite a test case.”

A test case may provide clarity from the courts but it’s high risk, high reward.

Finally, there is the “Great Santori Disappearing Act” (Act). Marco Santori was a New York City lawyer with Cooley LLP. His firm profile page states: “I help innovators navigate financial regulations. Sometimes, we rewrite those regulations together and make them better.” (Mr. Santori has apparently recently accepted a new position.)

Mr. Santori and his team invented a security vehicle that disappears when used. Some issuers accepted his handiwork. “A few of our clients are already testing it in the wild.”

The Act holds utility tokens are securities in presale before a useable network protocol. These SAFT security tokens disappear and reappear as utility tokens once the protocol is live. “So, the SAFT framework calls for securities laws when the buyer takes on enterprise risk, and calls for the consumer protection laws when the buyer takes on product risk. That struck us, the authors of the white paper, as the right state of affairs, and we think the SAFT gets us there.”

Critics widely panned “The Great Santori Disappearing Act” and given Clayton’s remarks, it’s probably untenable. The Cardozo Blockchain Project at Cardozo Law School critiqued the Act and concluded: “Artificially dividing the overall investment scheme into multiple events does not change the fact that accredited investors purchase tokens (albeit through SAFTs) for investment purposes, and likely will not prevent a court from considering these realities when assessing whether these tokens are securities.”

It’s unclear whether Santori’s clients in the wild will stick with the Act particularly since the magician has left.

  1. Don’t Tase Me Bro

Some lawyers have been more cautious and advised ICOs to follow some combination of equity-crowdfunding titles from the JOBS Act: Reg CF, Reg D, and/or Reg A+.

Lawyers exemplified this posture at an LA conference late last fall where industry professionals discussed SEC-less ICOs. According to an article, “Concerned audience members eagerly asked the expert panelists whether there was ability for a company that did unregulated ICOs to come into the fold and now adhere to regulations.” The answers were grim.   

One expert reminded the audience that firms that gave legal opinions handed their clients “lottery tickets.” “If you get sued or regulated by the SEC, CTFC, or someone else, you can then go sue your law firm for giving you bad advice. It doesn’t actually save you.” Another one grimly described an SEC investigation as “living in hell without dying.”

How hard the SEC pursues lawyers who advised ICO clients their tokens were not securities or that the security-yoke magically evaporates is unknown. It’s also possible utility tokens do exist somewhere beyond the SEC’s reach.

But after last year’s wild ride, most lawyers will avoid the taser this year.

By Jossey PLLC

Five ICO don’ts

Initial Coin Offerings (ICOs) will revolutionize raising business capital as more companies and blockchain networks develop and prosper. Last year ICOs raised over $3.7 billion. January started strong with a record $1.4 billion reported from 67 ICOs.

But with any nascent fundraising tool scammers and regulators play cat and mouse. The SEC has taken an increasingly hard line, which augurs higher compliance costs per dollar raised. In a recent op-ed, SEC Chairman Jay Clayton stated, “The SEC is devoting a significant portion of its resources to the ICO market.” The message is clear: play by our rules or get an experience one seasoned securities lawyer described as “living in hell without dying.”

So in the spirit of the new paradigm facing the ICO world, here are five ways not to ICO.

  1. Don’t pick a fight you can’t win

Arise Bank is a Texas-sized con. Two guys claimed they were creating a digital bank of the future that would support over 700 virtual currencies. Their ICO hoped to raise over a billion dollars but didn’t bother to register with the SEC or state regulators. They also claimed to have bought a couple 100-year old FDIC insured commercial banks with the goals of solving compliance problems—an apparent outright lie. Nor did they mention one of the principal’s violent criminal history and prison record.

When the SEC came calling Arise posted an epic Facebook rant about their upcoming fight with the SEC.  “Several branches of the various governments within the United States are run by cowards, liars and downright frauds . . .” In failing to register their offering, lying about their transactions, and failing to disclose previous criminal history they positioned themselves as ‘fighting for all our rights.’ The courageous duo spoke for WE THE PEOPLE (all caps!), and proudly fought the corrupt “system.” (“It’s the system, man” is a common refrain among scoundrels ranging from Harvard law professors to two-bit criminals.)

Both state and federal regulators have filed actions against Arise, it won’t end well.

  1. Disclaimers won’t help

Some ICO promoters try to avoid SEC jurisdiction by imaginative labeling and disclaimers.  “Utility tokens” they claim aren’t securities but just in case lather their whitepapers with warnings about potential SEC trouble.

Munchee was a restaurant-based app trying to raise money by selling “utility” tokens. Its white paper has three pages warning that even though they had analyzed Munchee for SEC issues and concluded none existed, trouble might still arrive. “Munchee Inc.’s representations and securities assessment is not a guarantee that the SEC or any other regulatory authority will not determine the tokens to be securities subject to registration.”

Trouble came. Noting the token’s marketing materials and audience were ICO-like the SEC analyzed the token and concluded unsurprisingly they were securities. “Determining whether a transaction involves a security does not turn on labelling – such as characterizing an ICO as involving a “utility token” – but instead requires an assessment of ‘the economic realities underlying a transaction.’”

Munchee quickly halted the sale.

  1. Don’t make ridiculous promises

R2B coin is a token that sounds too good be true and adheres to the axiom against such offers. Hong Kong-based but selling globally, promoters incredulously promised on their now “under maintenance” website “r2b coin if you study the history, only goes one way, and that’s up. We’re only going up, we’re never going down in value.” They further promised to hit a certain benchmark within two years and “will be among top 10 currencies in 1–1.5 years.”

The busy Texas State Securities Board filed an emergency cease and desist order to stop R2B from selling tokens in the Lone star State.

Munchee earns an honorable mention for promising to “ensure that MUN token is available on a number of exchanges in varying jurisdictions to ensure that this is an option for all token-holders.” This was impossible to guarantee with the acknowledged specter of SEC trouble. 

  1. Don’t incorporate overseas

Just as Hong Kong registration couldn’t stop action against R2B, a Massachusetts man played a too-clever-by-half game with Bay State regulators and lost.

Kirill Bensonoff a resident of Brookline—a bedroom community near Harvard—sold “Caviar tokens” for his property-flipping scheme. To avoid U.S. regulators Bensonoff incorporated in the Cayman Islands. In reality, he ran Caviar from wealthy Brookline.

Bensonoff’s plot involved dodging US authorities by avoiding U.S. investors. He even blogged his strategy beforehand. But the plan failed. When regulators investigated, one tried to purchase Caviar tokens using the name of a famous cartoon character (rumored to be Mickey Mouse) and provided a false photo ID fetched from an internet search. The third-party verifier tasked with blocking U.S. residents cleared Mr. Mouse for investment in 29 minutes.

And regardless of incorporation, regulators concluded “Respondents’ offers to sell Caviar tokens originate from within the Commonwealth of Massachusetts.”

State regulators have sued Bensonoff it won’t end with either champagne wishes or Caviar dreams for Mr. Bensonoff.

  1. Celebrities don’t care about you.

Three token sales secured celebrity endorsements. But when the law came knocking the stars bailed. The various promotional social-media posts had the desired effect of profile raising. Unfortunately all later turned out be scammy and stars the deleted their posts faster than they buy Twitter followers.

Hotel heiress Paris Hilton tweeted she was “looking forward to participating” in the LydianCoin ICO. But the coin’s originators had some untoward skeletons that burst open after the reality star’s nod. She has now deleted the post.

Boxing superstar Floyd Mayweather stepped in the ring for Centra ICO. But he threw in the towel when class action lawsuits arrived and deleted his posts.  

And even Arise Bank managed to tap boxing legend Evander Holyfield to promote their fraudulent sale.

Unsurprisingly the SEC warned both the public and the celebrity promoters. “Any celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the promotion . . . Persons making these endorsements may also be liable for potential violations of the anti-fraud provisions of the federal securities laws . . .”

For all the foolish don’ts there is one very smart do. Hire legal representation. ICOs along with the underlying technology may be the future, but the path of least resistance is filled with prosecutors and regulators looking to make their names on your creation. 

By Jossey PLLC

CFTC regulation coming to a cryptocurrency near you

Having exchanged gifts and sang about old acquaintances not forgot the Securities and Exchange Commission (SEC) and the Commodity and Futures Trading Commission (CFTC) are back to bitcoin bustin’.

Last fall’s wild ride frazzled regulators as they searched their bureaucratic souls about whether they are duly protecting investors in this brave new world.

The SEC of course has been at this for a while, having last summer declared the defunct DAO a security and thus under its aegis. And Chairman Jay Clayton recently issued a ‘stern’ warning to market professionals about crypto guidance.

But heretofore, the CFTC rode a more cautious track. The agency didn’t formally recognize bitcoin as a commodity until 2014. It had stated US law does not provide for “direct, comprehensive Federal oversight of underlying Bitcoin or virtual currency spot markets.” Chairman J. Christopher Giancarlo stated the CFTC had “limited statutory authority” over these “largely unregulated markets.” Perhaps market professionals weren’t the only ones sternly talked to.

In a joint op-ed last week, Clayton and Giancarlo declared their agencies will pour abundant resources into crypto regulation. For the SEC that means Initial Coin Offerings (ICOs) are securities regardless of secondary or utility traits.

CFTC-regulated exchanges normally “self-certify” and start trading futures without agency approval. But the agency consulted with two major exchanges before trading bitcoin futures, implementing new rules for greater investment protection. By doing so, the agency declared it now has “clear legal authority” that allows “oversight over the U.S. bitcoin futures market and access to data that can facilitate the detection and pursuit of bad actors in underlying spot markets.”

The CFTC’s epiphany means bitcoin futures are subject to “heightened review” to produce “extensive visibility and monitoring of markets for virtual currency derivatives and underlying settlement rates.” This includes “robust enforcement,” “asserting legal authority,” and “government-wide coordination.”

The CFTC clearly thinks extra scrutiny is needed to catch scammers and ensure market fairness and efficiency. It may be right. Scammers certainly exist and the agency is hunting pilfering confidence men.  

Colorado millennial Dillon Dean bilked over $1 million from 600 investors looking to use his nonexistent “expertise” in binary options contracts. Dean insisted on being in paid in bitcoin. He (allegedly) pocketed the money without making a single trade.  

In Las Vegas, scammers Randall Carter and Mark Gillespie created My Big Coin and perpetuated a years-long scam worth over $6 million. The duo claimed their fake coin was accepted anywhere Master Card was. The money (allegedly) went for “personal expenses and the purchase of luxury goods.”

Lest any East Coasters think they are too sophisticated for such ruses, they aren’t. A New York charlatan took a different track with the same result. Patrick Kerry McDonnell, a self-anointed “cryptocurrency investment expert” created CabbageTech to sell tips, promising at one point 300% returns. But soon after would-be clients gave the cabbage, McDonnell stopped talking. He (allegedly) “misappropriated” the funds.

The interesting question is would CFTC regulation have stopped any of these (alleged) scams a priori? Regulators say the tech boom of the 1990s shows oversight is vital. But the analogy doesn’t quite hold. Disclosure and protections were already there during the tech IPO boom. No one claimed the SEC didn’t have jurisdiction, and the rest followed all the rules yet lots of people gambled and lost. FOMO ruled the day as it does now with bitcoin.

The SEC and CFTC must find the fine line between prosecuting fraud and overburdening innovation.

By Jossey PLLC

The SEC mobilizes for war

Unlike the Environmental Protection Agency, the Securities and Exchange Commission lacks a paramilitary force. But one recent article says it’s nonetheless preparing for war. The SEC’s enemy is initial coin offerings (ICOs), a capital raising tool popular with “fintech” companies immersed in blockchain.

In a 10,000-word tome, consultant John Stark, a 20-year veteran of the SEC’s enforcement division, outlined the Commission’s battle plan. The opus included a myriad of violent and marital imagery. “Sweeps” appears eight times, along with “counteroffensives,”  “well-stocked statutory armory,” “onslaught,”  “dragnet,” and “blood on the floor.” One wonders if Mr. Stark is discussing a government agency or the Viet Cong.

Joining the SEC in this bloody coalition are various federal, state, and even international bodies ready to fix bayonets and charge (!) for the glory of investor protection.

Assuming Mr. Stark knows his subject, the SEC’s mobilization raising interesting questions about the role federal regulators should play at the dawn of the third internet. The agency like so much of the administrative state arose via the government-induced-and-exacerbated Great Depression.

How much should the SEC keep people from themselves and their foolhardy choices? To Mr. Stark this answer is manifest given that in the early 2000s “many investors also lost their life savings by buying into IPOs of companies encompassing little more than a sales pitch with the word “Internet” in the description.” Assuming this is true, those IPOs came with massive SEC-enforced disclosure. In America shouldn’t someone be able to risk their entire life savings on an investment that could bring gargantuan wealth? The wisdom of such risks should probably be the domain of adults smart enough to attain a life savings in the first place.

Of course, some ICO’s have not given potential investors all the available information and others have outright lied. The SEC recently charged a Brooklyn conman after allegedly lying about material facts on two ICOs. Thus far, the agency has focused on these situations.

But to Mr. Stark and many others this isn’t enough. The government should protect investors from fully disclosed and vetted opportunities. This common bureaucratic view though has a price.

As John H. Cochrane, Senior Fellow of the Stanford Institute for Economic Policy Research states:

Financial regulations are often enacted with little concrete definition, to say nothing of quantification, of their costs and benefits. Regulators and economists have little understanding of causal mechanisms that may provide benefits and incur costs. Worse, they often think they know cause and effect, either wrongly or with far more precision than they actually do, and enact regulation on the basis of unverified cause-and-effect speculation. Agencies and regulations often work at cross-purposes, one promoting what the other tries to reduce—lending to poorer and riskier borrowers, for example. Regulations stay in place long after everyone sees they are not working or are counterproductive. Regulators layer on additional rules to combat the consequences of the last round, which have their own adverse consequences. 

More than ignoring the consequences of its actions, the SEC’s silence towards those trying to create SEC-compliant ICOs has worsened the situation. The agency stonewalled until July when it retroactively declared the failed DAO ICO a security and thus subject to its jurisdiction. Observers have since been forced to read into Commissioner statements for guidance.  

Staff-level guidance fares no better. One seasoned securities attorney describes his recent experience:

One inquiring ICO issuer was, essentially, referred by the SEC Staff to the Howey test and told to consult further with his securities counsel.

My own recent experience, as a seasoned securities lawyer on behalf of an ICO issuer of utility tokens, did not fare much better. Yes, I prepared a detailed written analysis of my client’s “facts and circumstances,” and dutifully directed it to the SEC Staff at  The Staffer who eventually responded to my inquiry was thoroughly knowledgeable. Yet in the end, he was unwilling to get into “facts and circumstances,” instead directing me to the same case law which I had already reviewed.

This puts everyone in the stance of wondering if they will be on the business end of SEC artillery. One lawyer recently described being in the SEC’s crosshairs “like living in hell without dying.”

So to recap: Commissioners give off-cuff warnings when publicly asked, staff won’t say anything that could be construed as helpful and insiders direly warn of forthcoming bombardments and “sweeps.” The only people who benefit here are consultants, presumably with personal relationships on the SEC’s enforcement staff, who are available at the right price for “guidance.”

But this does little for innovators and lawyers begging for road maps to keep clients from becoming collateral damage instead of participants in a technological explosion about to reinvent 21st-century life.  

Bitcoin, the basis for ICO, is not going away. It will continue to integrate into our everyday financial transactions and everyday activities. As it does, ICO will continue attracting companies involved in blockchain technology. Congress and the SEC should provide a path for SEC-compliant ICOs that will benefit the American economy and mankind.

Congress should direct the SEC to implement the following fixes for ICO companies seeking compliance:

  • The SEC should integrate ICO with Reg A+ and make clear Reg A+-compliant ICOs face no other regulatory barrier. This includes waiving onerous state-level hurdles as the Treasury recommended in a recent report: “Although federal securities laws do not impose trading restrictions on [Reg A+] Tier 2 securities, state “blue sky”  laws  may  impose  registration  requirements . . . state  securities regulators [should] promptly update their regulations to exempt secondary trading of Tier 2 securities or,  alternatively,  the  SEC  use  its  authority  to  preempt  state  registration  requirements  for  such transactions.”
  • Raise the limit on Reg A+ Tier 2 to $100 million from $50 million over a 12-month period. This ensures ICOs can get the capital it needs while enduring a public qualification process.
  • Reduce post raise reporting to annual instead of semi-annual. The ICO company must still report major changes but it can reduce accounting and legal fees. Given the liquidity Reg A+ provides market signals will provide investors needed information.
  • Streamline broker dealer rules to allow finders and promoters to operate without fear of SEC enforcement. A “broker-dealer lite” could enhance visibility for new ICOs and speed secondary-market maturity.

These quick, pain-free fixes could ensure a smooth transition to fully SEC-compliant ICOs. US companies can continue to innovate in ways that improve all our lots. And only scam artists and cheats are ‘sent to hell without dying.’  

In 10,000 words Mr. Stark dedicates one-half sentence to not stifling technological innovation. If his attitude is indicative of the SEC’s enforcement division and Congress discards its overseer role, technological advances will capitalize in Russia or London and even consultants will feel the burn.

By Jossey PLLC

JOSSEY PLLC can help capitalize your business!

Equity Crowdfunding and the JOBS Act

President Obama signed the Jumpstart Our Business Startups (JOBS) Act in 2012 after receiving overwhelming bipartisan support. The equity crowdfunding law helps startups and smaller businesses raise capital through innovative rules and regulatory rollback. The SEC began implementing the law in 2013, finalizing the last title in 2016.

This memo focuses on three important changes the JOBS Act made to securities law: Reg A+, Reg D 506(c), and Reg CF. It explains how each has helped businesses capitalize along with changes the US Treasury suggests to increase their value and use. Finally, this memo explains how JOSSEY PLLC helps businesses with each regulation.

Reg A+

  • Two-tiered crowdfunding mechanism that also serves as a public-offering onramp for smaller issuers
  • Tier I: Issuers can raise up to $20 million from accredited and nonaccredited investors. Issuers have relatively small upfront accounting burdens during qualification but are subject to a state-level “coordinated review process”
  • Tier II: Issuers can raise up to $50 million from accredited and nonacredited investors. Issuers face higher upfront accounting burdens but raises are preempted from state-level qualification (but not notice or fees)
  • Issuers can “test the waters” to gauge interest without incurring substantial accounting or legal fees
  • Financial instruments are unrestricted (freely tradable) although issuers may choose to impose contractual transfer restrictions and state-level ambiguity exists

Reg A+ So Far

In the year after implementation (November 2016), 147 companies filed Regulation A+ offerings seeking $2.6 billion in financing. Of these, the SEC qualified approximately 81 offerings totaling $1.5 billion, 60% were Tier II.

The average size of the Reg A+ offerings was around $18 million, with most issuers having previously engaged in private offerings. Despite the increase from previous Reg A rules, Reg A+ issuers sought significantly lower capital amounts than issuers using other exemptions, such as Reg D.

Nonetheless, the Treasury Department recently stated, “Regulation A+ has enabled more companies to take advantage of the ‘mini IPO’ process than under the previously existing Regulation A registration exemption for small offerings. A Tier II offering may be less costly than an IPO, particularly for companies seeking relatively smaller amounts of capital.”

Reg D 506(c)

  • Amended Reg D 506 into ‘b’ and ‘c.’ Allows general solicitation for Reg D offerings for accredited investors only
  • Financial instruments are “restricted,” investors must generally hold them for one year
  • Issuer must take “reasonable steps” to verify investor status as accredited
  • Exempts from broker-dealer registration websites displaying Reg D offerings if profits derive from co-investment with accredited investors
  • Notice filing with SEC and states, offers take form of private-placement memorandums

Reg D 506(c) so far

General solicitation has had a positive yet tiny effect on the private placement market. According to SEC data, for the approximately three-year period through the end of 2016, issuers raised $107.7 billion in debt and equity offerings under Rule 506(c); during the same period Reg D 506(b) issuers raised $2.2 trillion. Thus, Rule 506(c) offerings amount to only 3% of capital raised under Rule 506.

The availability of online marketplaces has had a positive effect: during the past three years, 16 online marketplaces have raised nearly $1.5 billion in over 6,000 private offerings for accredited investors.

Reg CF:

  • Issuers can raise up to $1.07M from accredited and nonaccredited investors over a 12-month period and can set a minimum and maximum range
  • Financial instruments are “restricted,” investors must generally hold them for one year
  • Investors are subject to limits based on income and net worth
  • Issuers sell financial instruments over a FINRA-approved portal (website)
  • Issuers must track financial instruments and file a year-end report with the SEC

Reg CF so far

In the 12-month period following effectiveness (May 2017), 335 companies filed Reg CF offerings with the SEC and there were 26 portals registered with FINRA. Of the filed crowdfunding offerings, 43% were funded, 30% of campaigns ended unsuccessfully, and the others are still ongoing. Total capital committed was in excess of $40 million. On average, each funded offering raised $282,000 and included participation from 312 investors.

Businesses from a variety of sectors have utilized Reg CF with food and beverage, entertainment, sports, and transportation leading the way:

Source: Crowdfund Capital Advisors

Certain portals have separated themselves but it is very fluid and some outperform depending on the type of business.

Source: Crowdfund Capital Advisors

Future Fixes

In October 2017, the U.S. Treasury recommended changes for each regulation to increase use and value. Congress should consider these changes in Spring 2018.

Reg A+

  • Expand Reg A eligibility to include Exchange Act reporting companies. This would provide already public companies with a lower-cost means of raising additional capital and potentially increase awareness and interest in Reg A offerings by market participants.
  • Encourage state securities regulators to promptly update their regulations to exempt secondary trading of Tier 2 securities or, alternatively, have the SEC use its authority to preempt state registration requirements.
  • Increase Tier II limit to $75 million.

Reg D 506(c)

  • Encourage SEC, FINRA, and the states to propose a new regulatory structure for finders and other intermediaries in capital-forming transactions, “broker-dealer lite.”
  • Amend the accredited investor definition to expand the eligible pool of sophisticated investors. The definition could be broadened to include any investor who is advised on the merits of making a Regulation D investment by a fiduciary, such as an SEC- or state-registered investment adviser.
  • Review the Securities Act and the Investment Company Act provisions that restrict unaccredited investors from investing in a private fund containing Rule 506 offerings.

Reg CF

  • Allow single-purpose crowdfunding vehicles advised by a registered investment adviser, which may mitigate issuers’ concerns about having an unwieldy number of shareholders and tripping SEC registration thresholds.
  • Waive investment limits for accredited investors as defined by Regulation D.
  • Change limits for nonaccredited based on the greater of annual income or net worth for the 5% and 10% tests, rather than the lesser.
  • Increase the limit on how much can be raised over a 12-month period from $1 million to $5 million.

What Equity Crowdfunding can do for your business

Besides capital to help your business grow, equity crowdfunding provides other benefits unique to this model.

  • Broaden your investor base: Unlike other funding models, equity crowdfunding can diversify your investor base from both a financial and geographic standpoint. Issuers can accept investors from anywhere in the US, giving your business a potential foothold in all 50 states.
  • Turn your customers into marketers: Equity Crowdfunding allows your customers to become investors in your business and see their investment grow as your business grows. This provides free marketing for your business with every new investor.
  • Incentivize your investors: Equity Crowdfunding allows you to reward investors with benefits thematic to your business. Depending on the product, this could include the product itself, ‘founder’ status on your website, access to events, or anything else that may induce investment.
  • Prove value to institutional investors: A successful equity crowdfund raise can show larger, institutional investors your business is ready for big money. Many larger investors are now requiring “social proof” of a company’s business model. A successful raise shows larger investors value and momentum. It can also provide your business “bridge money” while larger investors evaluate your model.

How JOSSEY PLLC can help capitalize your business

Any successful equity crowdfund has three components: Legal, Accounting, and Marketing. A successful raise will require upfront fees and sometimes be subject to post-raise fees and ongoing SEC compliance.


  • Handle all disclosures and regulatory compliance with the SEC. This includes SEC Forms and qualification processes depending on the regulation
  • Research the best vehicle for your business and product, make recommendations based on the best fit to maximize your raise
  • Recommend a particular financial instrument and tailor the contract to fit your needs
  • Review contracts, negotiate with vendors, recommend accountants and marketers

Live Selling:

  • Free advertising and profile on (thousands of unique visitors/month)
  • On call for any legal, regulatory, or compliance question you have; usually get back with an answer in less than 24 hours.

Post Raise (additional monthly fee):

  • Act as general counsel for your business. Answer any legal, regulatory, or compliance question that may arise. Review contracts, negotiate with vendors, and give general advice on employment and other business issues.
  • Track financial instrument changes in ownership throughout the year as required by certain SEC regulations.
  • Handle legal review of SEC compliance reports as required by certain regulations.


This document is for informational purposes only. It does not represent a contract, offer, or any legal obligation on the part of JOSSEY PLLC. Many factors go into a successful raise including appeal of the product, market for the product, quality of marketing, operating history of the company, experience of management, and ability to self-generate crowd investors. Legal and regulatory compliance is only one part. Investing in small companies and startups carries lots of risk, there is no guarantee any issuer will have a successful raise.

For further information and a free consultation, please contact:


(202) 779-5768


SEC Unleashes Hurricane ICO

Hurricane ICO

Always hip with the times, the SEC set loose its own hurricane, Icarus (ICO for short) this summer. Instead of dowsing everyone with rain, Icarus threatens to burn those who get too close to crypto gold.

Icarus has panicked refugee blockchain companies as they scurry for shelter from Icarus’s gaze. Although forecasters had predicted the storm for months, would-be ICOs reeled at the inferno, at least temporarily.

The SEC conceived Icarus in a summer report on the now-infamous DAO disaster. DAO was a tokenized universe allowing crowd investors to participate, direct, and profit from decentralized company projects. Hackers cracked the code and ruined the fun. A year later, the SEC arrived and claimed DAO tokens were securities subject to registration. This meant the ICO market, topping $2 billion this year alone is on ice.

Some blockchain companies are now sheltering under the SEC’s umbrella. Filecoin a red hot ICO producing upwards of $200 million has filed two Reg D registrations with the commission; one for the presale to venture capitalists and the second for the crowdsale using a “SAFT” based on the SAFE popular with Reg CF.

Others have chosen to ignore the warnings and try to weather the storm. BitBounce’s Credo has plowed ahead with ICO plans sans SEC registration claiming Credo’s token don’t meet Howey-test markers. If wrong it could endure years of SEC haggling before final resolution. The SEC has already begun to crack down on other ICO-related concerns including First Bitcoin CapitalCorp., CIAO Group, Strategic Global, and Sunshine Capital. 

For those wishing to avoid any future SEC-induced storms, three possibilities emerge:

  • Reg D: Perhaps the easiest because of the small regulatory burden and lack of limits, Reg D requires no upfront SEC compliance. Companies only notify the agency after the raise. Drawbacks include a verification process for accredited investors and a lack of liquidity, as investors must hold the securities for 90 days.
  • Reg CF: As currently configured, Reg CF is not ICO friendly because of its $1.07M one-year limit. But companies may stack Reg CF with Reg D to capture unaccredited investors. Reg CFers, however, must hold the securities even longer, one year, unless sold to accredited investors among other exceptions.
  • Reg A+: This may be the most interesting. The “mini-IPO” option requires more upfront costs as the SEC must pre-qualify the offering and limits exist based on investor income. But once live the ceiling is $50M and even better instruments are instantly tradeable making the secondary market most like the wild-West ICO of yore (this summer).

The SEC is still sorting the ICO market and asking the regulated community for input. But the commission should forecast calm seas and a light regulatory burden if the US is to remain competitive in this emerging securities market.

Russia-based platforms are developing that could gobble significant ICO infrastructure and innovation.  For instance, Russian platform Waves recently announced users can deposit US dollars for token backed 100% by dollar reserves for its ICO offerings. It also partnered with Deloitte CIS for ICO and customized blockchain solutions.

The SEC will decide whether US-based blockchain companies and investors are in for clear sailing or in the eye of the storm.

By Jossey PLLC