License, registration, I ain’t got none

I love it when SEC Commissioners quote (arguably even cite in support) the Boss.

This is Hester Peirce, aka CryptoMom, proposing a safe harbor for crypto entrepreneurs who are developing tokens on netw yet to be built. She summarizes the problem thus:

Many crypto entrepreneurs are seeking to build decentralized networks in which a token serves as a means of exchange on, or provides access to a function of the network.  In the course of building out the network, they need to get the tokens into the hands of other people.  But these efforts can be stymied by concerns that such efforts may fall within the ambit of federal securities laws.  The fear of running afoul of the securities laws is real.  Given the SEC’s enforcement activity in this area, these fears are not unfounded.

The current position of the SEC is generally that tokens to be used in such networks (or investment contracts relating to such tokens) are likely to be securities, and need to comply with the securities laws, even if they will become non-securities at some point in the future. Compliance can be complex, expensive and distracting, and may involve the temporary diversion of the network into a regulatory regime that will be totally irrelevant to it once its operations are successfully built out.

Commissioner Peirce suggests a three-year grace period during which the token network could be developed.

She suggests a new Rule 195, which would provide a safe harbor from registration with the SEC for transactions involving a token (as defined; the definitions are important here) where:

  • The development team intends the network to meet maturity within three years of the first sale of tokens, and are trying in good faith to make that happen;
  • Disclosures about the project, including the code, are posted on a public website;
  • The token must be offered and sold for the purpose of facilitating access to, participation on, or development of the network;
  • The development team must be trying to create liquidity for users; any secondary trading platform they use for that purpose must comply with money transmission, money-laundering and consumer protection rules; and
  • The development team must file a notice or reliance on the safe harbor.

State law would be preempted under this proposal.

At this stage, the Commissioner’s proposal is her own; it will take a while before Rule 195 is officially proposed for public comment. But she wants to hear from everyone in the crypto community, so read the proposal and let her know whether you think it works.

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