Crowdfunded Startups Get Boost with New SEC Rules

Crowdfunded startups received a major boost when the Securities and Exchange Commission (SEC) voted on proposals earlier this week to tweak Regulation Crowdfunding (Reg CF or equity crowdfunding). Reg CF allows entrepreneurs and small businesses to seek investment from the ‘crowd,’ greatly expanding their potential-investor pool.

The changes join a larger Commission effort to simplify the private-exemption rules and expand capital access for growing ventures. As SEC Chair Jay Clayton stated, “For many small and medium-sized business, our exempt offering framework is the only viable channel for raising capital. . . . The staff has identified various costly and unnecessary frictions and uncertainties and crafted amendments that address . . . inefficiencies in the context of a more rational framework that will facilitate capital formation for small and medium-sized businesses and benefit investors for years to come.”

The Commission was particularly attentive to impediments crowdfunded startups faced. Through Commission-requested comments, industry participants detailed myriad regulatory hurdles startups and small businesses face when using this exemption. These included low aggregate offering limits, discordant and confusing individual investor limits, restrictive solicitation rules, and capitalization table issues.

SEC modifies rules to help crowdfunded startups

The SEC listened and changed rules that were impeding Reg CF growth. Among the beneficial changes:

  • Raising the aggregate offer limit from $1.07M to $5M.
    • As Crowdfund Capital Advisors, which curates equity crowdfunding data stated about this change: “At $5 million, a tech startup can raise a seed round or a traditional small or mid-sized company can raise expansion capital.  This will open significant new opportunities for businesses to use this capital to recover from the current economic crisis or launch innovative new products and services.”
  • Removing individual investor limits for accredited investors.
    • This rule had perplexed many industry participants. Its removal now aligns Reg CF with the more established Reg D and Reg A+ exemptions, where accredited investors faced no such limits.
  • Allowing potential issuers to gauge interest in a raise (“test the water”) before filing.
    • This change is especially helpful for less experienced entrepreneurs unaccustomed to securities law’s confusing array of rules on what they can say and when (and the policy reasons behind them).
  • Allowing Special Purpose Vehicles (SPVs) to cabin all Reg CF investors into one legal “bucket.”
    • The call for SPVs has been perhaps the most persistent complaint from industry participants about Reg CF. Although questions remain about how this rule will function in practice, ideally it will solve the “messy cap table” issue frowned on by later investors.
  • Extend relief from financial-statement requirements for issuers seeking under $250k.
    • Although separate from the Commission’s summer 2019 initiative, the commissioners voted to extend for 18 months a temporary exemption from Reg CF’s financial statement-review requirements for issuers offering less than $250k in securities.

In surprise move, SEC allows crowdfunded startups to keep using SAFEs

A final surprising and welcome development is the Commission voted not to restrict security type as it had proposed. The Commission had previously expressed concern about certain financial instruments such as Simple Agreements for Future Equity (SAFE). Also scheduled for elimination were other nontraditional but helpful instruments like revenue shares and token-based structures. The Commission deserves credit for resisting its regulatory urge. These innovative structures that lacked any evidence investors were unhappy or confused by them. 

Reg CF was already growing, new rules could see explosive growth

Despite the now-cured impediments and after a slow start, Reg CF had already found its footing. Aided in part by the ease of investing online during the pandemic, Reg CF has set multiple records this year. This includes its best month ever in October ($32 million committed investments). According to Crowdfund Capital Advisors, the past six months have seen a 300% increase in investor commitments.

Crowdfunded Startup commitments

Moreover, the number of offerings year-to-year has continued growing as more businesses incorporate equity crowdfunding into their capital-raising plans.

Crowdfunded startups number of offerings

Crowdfunded startups could soon become the norm

Equity crowdfunding is set for explosive growth in the years ahead. The new rules will boost Reg CF’s already impressive momentum as more businesses and investors learn about and use this innovative tool.

The new rules will be effective 60 days after publication in the Federal Register. This doesn’t include the extension of the temporary Regulation Crowdfunding provisions. These will be effective upon publication in the Federal Register.

By Jossey PLLC via




Government greenlights stablecoins (kind of)

By greenlighting a banking rule, the feds again inched toward accepting the crypto revolution. The Office of the Comptroller of the Currency (OCC) declared big banks may hold stablecoin reserves for clients in hosted wallets. The statement follows this summer’s OCC proffer big banks could custody crypto. Always ahead of the curve, the most recent statement okayed a years-long practice but limited it unnecessary ways.

Stablecoins are tied to a fiat currency, or some other “stable” reserve like commodities or other cryptocurrencies. The tether can be a direct 1:1 peg or algorithm managed. Entrepreneurs created stablecoins to smooth crypto volatility.

Without government permission, the stablecoin market had swiftly grown. Coindesk reports from September 2019 to September 2020 the market jumped from $5 billion to $19 billion—much of it already backed by large financial institutions. But OCC unnecessarily limited stablecoin acceptance to 1:1-backed stablecoins and those in “hosted wallets,” presumably excluding business and individual wallets. This is bound to confuse and catalyze the need for further government clarification.

The SEC, always around, never there

And then there is the always-lurking Securities and Exchange Commission. The SEC is the exemplar of foot-dragging slow-reacting bureaucratic power. Anyone familiar with Commission documents could have written its statement beforehand plus or minus a few words. It states the OCC interpretation is limited, any securities analysis will be based on “facts and circumstances,” the aspiring stablecoin creator should visit, and “if appropriate” the Commission may issue a No Action Letter.

Perhaps no federal agency has ever used a phrase more than the SEC does “fact and circumstances.” What this phrase means is it will not provide clear public guidance on the fear that someone will subvert it and Commission would get blamed. It puts the burden on entrepreneurs to dance the SEC tune beforehand or risk a years-long investigation.

The Commission couches this invitation in nondescript language. “The Staff stands ready to engage with market participants to assist them and to consider providing, if appropriate, a “no-action” position regarding whether activities with respect to a specific digital asset may invoke the application of the federal securities laws.”

The Commission greenlights stablecoin disclaimers

But anyone who has talked with said Staff knows this isn’t quite true. Engagement is a regulatory two-step. You can talk to them, but don’t expect answers. They disclaim responsibility for their words. Here is last week’s example:

This statement represents Staff views and is not a rule, regulation, or statement of the Commission. The SEC has neither approved nor disapproved its content. SEC Staff statements, like all SEC Staff guidance, have no legal force or effect: they do not alter or amend applicable law, and they create no new or additional obligations for any person.

Got that? Come talk to us but don’t take our words seriously. The only surefire way to avoid a “facts and circumstances” probe is a No Action Letter. But that could take months, even years, and has limited precedential value.

NPC Valerie, SEC stablecoin czar

In the crypto world, the SEC’s top talker is NPC Valerie—a career bureaucrat.  Before the virus NPC Valerie traveled the country attending conferences and grinding ad nauseum the Commission’s “facts and circumstances” and “Howey” tread.  Here is her answer on whether algorithmic stablecoins constitute securities: “You might be getting into the land of security.” What does that mean? Nobody knows. It depends of course on the “facts and circumstances.”

The Commission kicker was a citation to the infamous April 2019 “guidance.” Insiders and media mocked the document as a confusing morass of nothingness. It stands thus far as NPC Valerie’s most comprehensive work product. (She didn’t sign it of course, why take responsibility for such a mess?) At the time Coindesk’s lead story was titled ‘SEC’s Crypto Token Framework Falls Short of Clear and Actionable Guidance.’ The Harvard Law Review called it “an inadequate substitute for clear legislation and judicial rulings.”

Crypto Mom breaks the mold

And Hester Peirce, aka Crypto Mom, at times the Commission’s lone voice of reason didn’t hold back:

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. Rather than sorting through the factors or hiring an expensive lawyer to do so, a wary company may reasonably decide to forgo certain opportunities or to pursue them in a more crypto-friendly jurisdiction overseas.

Crypto Mom

Commissioner Hester Peirce, AKA Crypto Mom

It is a testament to the Commission’s failed leadership that it still cites guidance people both inside and outside government have branded useless.

The feds have once again inched toward opening our decentralized, privatized future through stablecoin acceptance. They could help even more by providing clear rules and getting out of the way.

By Jossey PLLC via

How the expanded accredited investor definition affects equity crowdfunding

To much fanfare, the Securities and Exchange Commission (SEC) recently expanded the Accredited Investor (AI) definition. Individuals can now qualify as AIs via sophistication criteria and not just hard monetary limits. This change will increase the AI pool for startups and small businesses seeking investment. But it mainly affects Reg D offerings—by far the largest private exemption—which offers a binary: AIs can invest, non-AIs can’t.

Reg D’s dominance of the private markets is clear. In 2019 Reg D 506(b) issuers raised almost $1.5 billion. It dwarfs other exemptions like Reg A+, Reg CF, and Reg D 506(c) (similar to Reg D 506(b) except it allows general solicitation).  

Exempt Offerings 2009-2018

But how the new definition affects equity crowdfunding (Reg CF) is more complex. The short answer for now, is, it doesn’t. Because Reg CF already allows anyone to invest, more AIs are irrelevant. But it could matter soon, if the Commissioners approve the March 2020 proposals from last year’s Concept Release. For now, however, the hash Congress and the SEC made of Reg CF’s individual investor limits prevents the AI expansion from having impact.

Congress’s Reg CF individual investor limit exemplified bad drafting.

As enacted in Title III of the JOBS Act, Reg CF individual investor limits reads:  

[T]he aggregate amount sold to any investor by an issuer, including any amount sold in reliance on the exemption provided under this paragraph during the 12- month period preceding the date of such transaction, does not exceed— ‘‘(i) the greater of $2,000 or 5 percent of the annual income or net worth of such investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; and ‘‘(ii) 10 percent of the annual income or net worth of such investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000

Like most statutes this passage shows how lawmakers should not write laws. Congress could have defined a hard limit adjusted for inflation for non-AIs and no limit for AIs. Instead, Congress divided the Reg CF limit into four categories: (i) 5% of annual income; (ii) 5% of net worth; (iii) 10% of annual income; and (iv) 10% of net worth. Then it added a floor, $2,000 and a ceiling, $100,000.

It gets “better.” Congress failed to specify when each limit applies. Part one states, “if either annual income or net worth is less than $100,000 and part two states “if either the annual income or net worth . . . is equal to or more than $100,000.” So which is it? If someone’s income was $150,000 and net worth was zero, he would qualify for both brackets. And once in the bracket which limit applies, annual income or net worth? In the previous example if placed in the 5% bracket the limit would either be $2000 or $7,500.

The SEC interpreted Congressional ambiguity in the worst possible way

Congress tasked the SEC with writing the Reg CF rules and cleaning up its textual mess. In its typically chary way, the SEC chose the worst possible interpretation. First it declared investors must meet the $100,000 threshold for both income and net worth for the 10% bracket. Second it chose the lesser of income or net worth once placed in either bracket. Thus, is the previous example the rules limited the $150,000 salaried person with no net worth to $2,000.  

The Commission originally proposed the greater of standard but changed course because of the supposed greater equity crowdfunding risks:

We recognize that this change from the proposed rules could place constraints on capital formation. Nevertheless, we believe that the investment limits in the final rules appropriately take into consideration the need to give issuers access to capital while minimizing an investor’s exposure to risk in a crowdfunding transaction.

Importantly, the Commission also declined to exempt AIs from the formula. This distinguished Reg CF from Reg D and Reg A+ where accredited investors face no caps.

Equity crowdfunding continues to flourish despite bad drafting and regulatory hurdles

Despite government obstacles equity crowdfunding continues to grow. In arguing against expanding the AI definition a group of state attorneys general cited Reg CF underuse as evidence for restricting AIs.

[T]he equity crowdfunding market . . . has largely been underwhelming expectations despite significant deregulation to allow individual investors all along the financial spectrum to participate. Instead of a booming marketplace, equity crowdfunding has remained a niche market with fundraising falling well below the statutory caps and issuer-generated maximum targets for their offerings.

The AGs don’t mention the Commission-led barriers placed in Reg CF’s path, including confusing investment limits. Nonetheless after a slow start Reg CF has gained substantial ground in the past two years. According to Crowdfund Capital Advisors Reg CF investment jumped 37% between 2018 and 2019.

Proceeds into Reg CF Offerings

Equity Crowdfunding portals are having a record year  

Further massive Reg CF portals SeedInvest and Wefunder have reported their best months ever in 2020. And despite endless handwringing from regulators, academics, and nonprofits, Reg CF has not experienced predicted fraud and high-risk speculative investments. The Commission admits as much in its 2019 review of the exemption’s performance:

During the considered period, there were few instances of legal proceedings (involving FINRA or the Commission) referencing Regulation Crowdfunding, so we cannot infer a systematic relation between any particular characteristics of the offerings and the incidence of such legal actions. In particular, a search of publicly available information in the Commission’s litigation releases has not identified civil complaints or administrative proceedings filed against Regulation Crowdfunding issuers or intermediaries. We have, however, identified four actions initiated by FINRA against a funding portal member that involved alleged violations of Regulation Crowdfunding or FINRA rules.

The Proposed Rules along with the expanded AI definition will improve equity crowdfunding  

Equity crowdfunding seems poised to become a “booming marketplace” with the expanse of time and more favorable rules. Four years after a decidedly jaundiced Commission wrote Reg CF’s rules it has finally proposed improvements. One proposal seeks to correct its individual investment-limit mistakes. First it has proposed switching to the originally proposed “greater of” standard. Also, it has finally proposed lifting the caps for AIs. Assuming the Commission adopts the proposals as is, more equity crowdfunding investors will be free to invest without limits. This will further enhance Reg CF’s attractiveness to issuers and investors alike inching it toward the “booming marketplace” of state AG dreams.  

By Jossey PLLC via  

Equity crowdfunding poised to explode under SEC proposal

Last week the Securities and Exchange Commission (SEC) proposed sweeping changes to Regulation Crowdfunding (equity crowdfunding or Reg CF) as well as the other private capital-raising exemptions. The proposals come just months after the SEC closed comments on last summer’s Concept Release. The commission sought to harmonize, simplify, and streamline the exemptions. As SEC Chairman Jay Clayton stated, “The complexity of the current framework is confusing for many involved in the process, particularly for those smaller companies whose limited resources spent on navigating our overly complex rules are diverted from direct investments in the companies’ growth.  These proposals are intended to create a more rational framework that better allows entrepreneurs to access capital while preserving and enhancing important investor protections.”

The proposed changes to Reg CF are particularly significant. Congress enacted this exemption as part of the JOBS Act of 2012 to open the private markets to retail investors. The idea was everyone could invest in hotshot startups but also local businesses that supported communities. It would also allow entrepreneurs traditionally excluded from the angel investor/venture capital circuit a better chance to thrive by democratizing capital raising. Signs showed Reg CF had started to fulfill its potential. According to Crowdfund Capital Advisors, which curates equity crowdfunding data, since 2016 successful Reg CF companies had pumped almost one billion dollars into local economies.   

Equity Crowdfunding Map

Still, complaints persisted. Many companies thought the $1.07 million raise limit too small. And rules restricted Accredited Investors to relatively tiny amounts despite no such constraints with Reg D. Moreover, regulations forbade issuers from discussing and gauging interest in their raise before spending money on legal and accounting services. Finally, retail investors meant messy cap tables that dismayed later investors.

SEC addressed long-standing equity crowdfunding complaints in proposal

Yesterday’s proposal solves all these issues and sets the stage for a paradigm shift in U.S. capital raising. Among the potential rule changes:

  • Raise the overall to limit to $5 million: While not as big as some had hoped, this new ceiling allows for larger institutional players to invest alongside retail investors.
  • Remove Accredited Investor limits: Successful equity crowdfunds usually have a mix accredited and nonaccredited investors. Accredited Investors send important signals to each other and the larger market. Removing Reg CF’s arbitrary limit increases the chance for successful raises. And it partially eliminates the need to “stack” Reg Ds on top of Reg CFs so Accredited Investors can fully participate.
  • Allow ‘testing the waters’ communications prior to the raise: The ability to gauge interest in a raise before having to spend money on professional services is critical. Also, equity crowdfunding companies tend to be newer and less experienced with complex securities laws. This gives companies a better idea of their raise metrics, while still protecting investors. by preserving liability for misleading statements.
  • Allow Special Purpose Vehicles: Allowing issuers to “clean up” their cap table by placing Reg CF issuers into an SPV was perhaps the most consistent Reg CF failing. According to the SEC proposal: “In particular, public feedback has indicated that allowing the use of such vehicles could address concerns associated with managing the potentially large number of direct investors that could result from a crowdfunding offering, as those investments would be held through a single purpose entity.” This also alleviates concerns about Reg CF issuers having to prematurely register as public companies.

Equity Crowdfunding can explode under proposal

Indeed, these long-sought changes could have lasting effects on the private capital markets. It could truly democratize capital raising, allowing everyone an equal opportunity at potentially lucrative investments. It could encourage entrepreneurs normally off the angel investor/venture capital radar to bypass traditional-funding methods. And issuers can synergize crowd effects by melding their investors, supporters, and customers. And it could geographically disperse capital investing away from the few hubs where it currently happens.

According to the SEC press release, the comment period will remain open for 60 days following the publication of these proposals in the Federal Register.

By Jossey PLLC via

SEC Telegram Fight Shows Government At Its Worst

The Telegram SEC fight over whether “Gram” tokens are securities progressed when Telegram ‘answered’ in federal court. The move foretells a lengthy battle, something Telegram surely hoped to avoid. Telegram’s Answer spotlights myriad government crypto failures. Among them, mixed signals by officials, selective enforcement, policymaking by staff, unclear rules, and bureaucrats protecting agency power. Regardless of the SEC Telegram outcome, without changes America’s tech advantage will shrink whilst sinecures rise.

Telegram’s two defenses against SEC enforcement   

Telegram has two defenses but only uses one lest they admit clandestine attempts to skirt rules. Officially Telegram complains SEC rules are vague, scattershot, and violate due process. “Plaintiff has engaged in improper ‘regulation by enforcement’ in this nascent area of the law, failed to provide clear guidance and fair notice of its views as to what conduct constitutes a violation of the federal securities laws, and has now adopted an ad hoc legal position that is contrary to judicial precedent and the publicly expressed views of its own high-ranking officials.”

Yes. Telegram’s Answer covers many ad hoc apparatchik games. The three horseman of reaction, Shallow-End Jay Clayton, Bill the Butcher Hinman, and NPC Valerie Szczepanik play hot potato whilst Crypto Mom Hester Peirce stares incensed. Risk-averseness, so common to our three million “public servants,” isn’t bad with nuclear policy, global warming, or Ukraine favors. But here, their actions matter. The future American economy and our place as world’s chief innovator is at stake. Whether a court accepts SEC buck passing given DAO and NPC Valerie’s Dreadful Guidance is unclear. But the government has good odds.

Telegram SEC fight centers on decentralization

Telegram’s unspoken defense is “decentralization.” Decentralization isn’t in any court case or statute. Corp Fin Director Bill the Butcher created it. And while it makes sense, it lacks the analytical rigor crypto entrepreneurs need.

Bill the Butcher announced this policy last year:

The digital asset itself is simply code. But the way it is sold [determines whether it is a security.] But this also points the way to when a digital asset transaction may no longer represent a security offering. If the network on which the token or coin is to function is sufficiently decentralized—where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts—the assets may not represent an investment contract. Moreover, when the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede” and “the ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful.”

Crypto entrepreneurs embraced this statement lacking much else, save NPC Valerie’s Dreadful Guidance. When Congress pressed, Shallow-End Jay backed Bill the Butcher without actually using the word.

Crypto startups see decentralization as the only way around SEC compliance

Lawyers have earned millions working Bill the Butcher’s statement into the current capital framework. Most use Reg D for SAFTs but whether this covers the actual tokens is unclear.

Blockstack is the only successful Reg A+ offer thus far. In its offering circular it stated it expects to be decentralized and leave securities compliance within a year. Kik took a different route. It claimed its “Kin” tokens were already decentralized. And thus, like Bitcoin or Ethereum could avoid SEC oversight.

Telegram chose the Kik route, arguing the potentially disbursed 220 billion Grams would be de facto decentralized, but the SEC stopped it. As one CoinDesk commentator stated: “Last year, messaging platform Telegram funded the construction of its TON blockchain with a private placement which guaranteed future allocation of Gram tokens, which of course would be decentralized enough to not need to go through a securities registration. The SEC was not convinced.”

SEC filed against Telegram before it could claim decentralization

And the SEC laid bare Telegram’s plan in its temporary restraining order: “Indeed, by definition, the TON Blockchain can only become truly decentralized (as contemplated and promoted in the Offering Documents) if Grams holders other than the original Grams purchasers actually stake Grams… Stated differently, if the original Grams purchasers alone all immediately staked their holdings, the TON Blockchain would be centralized rather than decentralized and, therefore, subject to misuse and majority attacks.” [original emphasis].

Thus, both sides skate decentralization. Telegram demurs because it would tacitly admit it tried to skirt SEC mandates. The SEC avoids it because it’s somewhat unofficial.

Telegram SEC fight shows problems with government crypto policy 

But whatever happens, the government’s inability to explain its policy is a fiasco.

  • Relying on outdated precedent: SEC Enforcement defines securities from the 1946 Howey case. That worked for orange groves, but the world has changed slightly since mid-20th Century. Judicial precedent restrains the SEC, but also empowers it. The SEC likes Howey because it yields broad discretion.
  • Guidance that confuses more than clarifies: Crypto entrepreneurs have clamored for clear rules beyond outdated cases. The SEC responded with NPC Valerie’s Dreadful Guidance. It took 6-months to complete. And likely cost taxpayers upwards of a quarter-million dollars. And it only worsened things adding more factors to the Howey Test, without any inkling of weight or even if that was all. Anyone outside “public service” would have been fired for such waste.
  • Insistence entrepreneurs get permission: Not only does the SEC not give clear rules but it insists entrepreneurs ask permission through lengthy negotiations or laborious no-action letters. These letters may take years or not come at all. And others can’t use them as precedent. It also favors insiders, those represented by major law firms or with staff relationships.
  • Bureaucrats make policy without responsibility: Every document, speech, or murmur by an SEC functionary comes with disclaimers. No one takes responsibility or accountability. Bill the Butcher has a doctrine named for him—heady stuff—but ask if his statements represent the SEC. NPC Valerie travels the country on taxpayer dimes, receives VIP treatment at conferences. Ask her to opine beyond NPC fashionHowey, Howey, Howey.’
  • Real guidance comes through enforcement: The SEC can bankrupt a startup. It has no shareholders, no timelines, no need for profit, subpoena power, and essentially an unlimited budget. Try and cross them. They dare you.

SEC functionaries have hijacked crypto regulation

NPC Valerie summed the government’s crypto stance in a short yet revealing comment. “The lack of bright-line rules allows regulators to be more flexible.”

Just so, as these pages have opined:

This is true but has other effects. It leaves regulators with massive discretion. This gives them enormous power over the economy with no responsibility for the results. It mandates entrepreneurs approach them hat-in-hand for permission. And it makes them sought after speakers on the conference circuit.

But it’s a zero-sum game. Every unit of power Ms. Szczepanik reserves for herself and her colleagues removes it from job producers. Indeed, every ambiguous pronouncement shunts billable hours to lawyers and compliance professionals instead of research or marketing. Those building tomorrow’s economy need the flexibility not bureaucrats. They will power our future long after Ms. Szczepanik takes her professorship or retires to a nonprofit. 

Too few call out dreadful SEC crypto policy

A few, but only that, recognize the absurdity. Most prominently is Commissioner Hester Peirce, aka Crypto Mom. As a lone voice, she has repeatedly warned about this path: 

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 . . .

Congress could act to reign in SEC intransigence

Representative Warren Davidson (R-OH) stated:

Regulation by enforcement [has] all the charm and inefficiency of third-world power structures.

. . .

The SEC is doing a complete patchwork of regulation. No one knows where they’re going. They’re literally told if you want to launch a token, whatever you think you want to do with it, come check with the SEC first. . .. And you can grovel. If you grovel well enough, then we’ll give you a no-action letter. You have hundreds of companies waiting on no-action letters. They’ve approved two.

You can’t raise capital while you’re waiting for that.

And in the best exchange in a recent SEC Congressional hearing, Ted Budd (R-NC) mocked NPC Valerie’s Dreadful Guidance, which is a poster child for bureaucratic drivel.

Budd: In April Fin Hub published a framework for investment contract analysis of digital assets which included 60 plus factors for determining whether or not the SEC would consider a digital asset a security. In a statement released alongside your framework your colleagues Bill Hinman and Valerie Szczepanik indicated that the framework is not intended to be an exhaustive overview of the law. But rather an analytical tool to help market participants . . . [H]as the guidance helped resolve their most important questions?

Crypto Mom: [No]

Budd: So last question, when can market participants expect and exhaustive overview of the law so that they can get the regulatory certainty required to continue to innovate and create American jobs.

The world keeps spinning while the SEC ensures America falls behind

But sound bites won’t change Commission practice. The Telegram SEC fight is only a symptom. Indeed, the SEC embodies the administrative state run amok—the Machine whose highest priority is turf protection and DC cache. The political and judicial branches must cabin administrative agencies. Or future Americans will be tech colonized by those less concerned about Washington chatter or who retires to an Ivy League teaching post.

By Jossey PLLC via

SEC Investor Advisory Committee Pits Nannies Against Doers

The speaker list screamed. The SEC Investor Advisory Committee recently heard testimony on the proposed Concept Release on Harmonization of Securities Offering Exemptions. And the invitees shrieked irreverence for America’s innovators.

The majority talkers—academics, policy pushers, and regulators (Nannies)—played their part as innovation hurters, capital killers, and job jerkers. Startups, say the Nannies, must go through them for the privilege of driving the economy.

The SEC Investor Advisory Committee is typical Washington—formed through Dodd-Frank, a political overreaction to a downturn the government itself helped create. It holds hearings and recommends solutions to problems that may not exist to commissioners who may not read them. Its purpose is appearance and to provide some insiders a sinecure. The SEC Investor Advisory Committee is staffed with well-meaning academics and agitprops who never work where they play. But sincerity does not obviate uselessness.

Nannies and Doers presented different ideas about capital raising

Everyone knows capital-raising rules are unforgiving and prolix. And they limit the best prospects to the already moneyed. Thus, two solutions: (i.) allow everyone to invest in riskier but higher reward early-stage companies; or (ii.) force everything into the public markets or die.

The Nannies, Boston College professor Renne Jones (a veteran of such panels), policy hack Tyler Gellasch, state bureaucrat Andrea Seidt, knew the answer. Each spoke of rules, rules, and oversight. None ever signed the front of a business check. None ever will.  

Worst was Mr. Gellasch, the neo-New Dealer. In a bygone era, his likeness walked confidently behind Rexford Tugwell or Henry Morgenthau. Full of bravado, confidence, and self-assured in his ignorance. The only thing missing were the wingtips and zoot suit.

Gellasch was the guy 90 years ago telling Americans he could fix things; he and his pals were the smart ones. So smart, it turned out, they took an 18-month downturn and made a 10-year calamity. And left us with a permanent bureaucratic ruling class as the tax we pay for being Americans.

The Doers gave the SEC Investor Advisory Committee needed insight  

Standing apart were angel investor Catherine Mott, and compliance CEO Sara Hanks (the Doers). The difference between the two groups is stark. The Nannies look at reports, attend conferences, and think of new ways to control those they study and regulate.

The Doers think in ideas. How to solve problems. This is hard work. Entrepreneurs give their lives to work, knowing the odds aren’t good. Some spend years at or near bankruptcy before success. Gains bring the Nannies’ watchful eyes. The Nannies never know failure (or success) because they never try. Their realm is not ideas but rules and rulers, and obedience to both.

Ms. Mott’s testimony was compelling. She fights the geographic opportunity gap. What happens when a Western Pennsylvania factory shutters? Can a Mississippi startup get a chance with current rules? Right now, Ms. Mott says no. The morass of rules and the zeal to enforce them overpowers outsiders. The money, says Ms. Mott, is looking elsewhere and America loses as a result.

Entrepreneurs get tripped up by regulations and can lose the opportunity to create an impactful enterprise. Harmonization of rules in a balanced fashion can facilitate innovation in the United states. When all net new jobs in the United States are created by companies five years old or less it behooves us to pay attention to the issues for real economic development purposes. Furthermore, China has gained significant ground at a remarkable rate in advancing innovation and encouraging capital investment in startups. The United States is falling behind.

Investor Advisory Committee gives short shrift to the difficulty following SEC rules

Ms. Hanks runs a company that helps startups with rules but even she gets flummoxed. Speaking of solicitation: “Nobody knows what it is, nobody can work out what the rules are. We waste so much time trying to comply with it when we should be trying to work out what information people need at the time of sale.”

Later she defended the much-maligned Reg A+ after Gellasch (of course) insisted it wasn’t working:

I just want to defend Reg A. So, the listing companies right now when I counted this morning there was nearly 600 filings that have taken place under Reg A. Some of them did not qualify because they were crappy. Some of them withdrew because no one was interested in investing because they were crappy and that’s the way the markets work. Of the 600 or so, roughly 6 went to the listing markets and they didn’t do well and a lot of this is because of let’s say optimistic pricing. A lot of it is the whole process and some of these companies may not have been ready to become fully listing companies.


But to take that half dozen and say that’s your data point for disaster or not is to ignore an enormous number of companies who have really nice business plans, who have managed to raise some funds and employ people and are eventually going to come to the public markets we hope. . . . So, I think it’s a little unfair to take a whole category of companies and say they’re all disasters based on the performance of six companies.

Despite what SEC Investment Advisory Committee Nannies say, the private markets are working

America’s private markets are the envy of the world, accounting for $2.9 trillion dollars in investment last year.

Private Markets 2.9T
Source: Securities and Exchange Commission

The further fact is that private investment has outperformed public markets over the past two decades and have lower volatility.

Private vs Public Markets
Source: Committee on Capital Markets and Regulation and Voya Investment Management (October 2017) via John Finley, Senior Managing Director & Chief Legal Officer, Blackstone

The Nannies hate this because private raises avoid the compliance cabal, quarterly reporting, activist shareholders etc. Being a public company is hard and costly, that is why there are fewer of them. But the U.S. economy is doing fine. If the Nannies succeeded there would be less startups, less jobs, less investment. But more lawyers, accountants, and regulators. Many companies, especially those not in California, New York, or Massachusetts lose out.

By adumbrating their position, the Nannies entrench those who can afford the public play and keep others with better mouse traps out. It is an academic version of regulatory capture.

What the capital markets need is an open playing field in the private world and acceptance the 1950s economy is gone. Instead of forcing companies into markets where they cannot win, laws should help startups raise small-dollar private money to prove viability.

Whatever happens the economy will not move forward with the Nannies haranguing the Doers.

By Jossey PLLC via