Category Archives: Legal Issues and Regulation

Canadian securities regulators provide additional guidance on securities law implications for offerings of tokens

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CSA | Staff Notice 46-308 | June 11, 2018

Montréal  The Canadian Securities Administrators (CSA) today published CSA Staff Notice 46-308 Securities Law Implications for Offerings of Tokens, which provides additional guidance on the applicability of securities laws to offerings of coins or tokens, including ones that are commonly referred to as “utility tokens.”

“Since publishing initial guidance, we have engaged with numerous businesses considering token offerings and have found that most of these offerings involve securities,” said Louis Morisset, CSA Chair and President and CEO of the Autorité des marchés financiers. “Our notice sets out additional guidance based on situations we have seen to date and common inquiries we have received from businesses and their advisors.”

CSA Staff Notice 46-308 outlines specific situations that may have an implication on the presence of one or more of the elements of an investment contract in the context of an offering of coins or tokens.

This notice supplements the CSA’s August 2017 publication of CSA Staff Notice 46-307 Cryptocurrency Offerings, which outlines how securities law requirements may apply to initial coin offerings, initial token offerings, cryptocurrency investment funds and the cryptocurrency platforms trading these products.

See: 

Any business planning to raise capital through an offering of coins or tokens should consider whether it involves the distribution of a security. In order to avoid costly regulatory surprises, businesses are encouraged to consult qualified securities legal counsel about the potential application of, and possible approaches required to comply with, securities legislation. Businesses should also contact their local securities regulatory authority to discuss possible flexible approaches to complying with securities laws, including time-limited exemptive relief.

The CSA Regulatory Sandbox is an initiative of the CSA to support financial technology (fintech) businesses seeking to offer innovative products, services and applications in Canada. The CSA has granted, through the CSA Regulatory Sandbox, exemptive relief from certain securities law requirements to firms in the context of offerings of coins or tokens that involve the distribution of securities, subject to conditions to ensure adequate investor protection.

CSA staff monitor cryptocurrency offerings activity and will continue to take action against businesses that do not comply with securities laws.

The CSA, the council of the securities regulators of Canada’s provinces and territories, co-ordinates and harmonizes regulation for the Canadian capital markets.

Source:  Security law implications for Offerings of Tokens

Download CSA Staff Notice 46-308 --> here

 


The National Crowdfunding & Fintech Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with cryptocurrency, blockchain, crowdfunding, alternative finance, fintech, P2P, ICO, and online investing stakeholders globally. NCFA Canada provides education, research, industry stewardship, services, and networking opportunities to thousands of members and subscribers and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding and fintech industry. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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SEC chief says agency won’t change securities laws to cater to cryptocurrencies

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CNBC | | Jun 6, 2018

  • The head of the Securities and Exchange Commission Chairman made it clear Wednesday that the agency won't be bending the rules for cryptocurrency when it comes to defining what is or what isn't a security.
  • "We are not going to do any violence to the traditional definition of security that has worked for a long time," SEC Chairman Jay Clayton told CNBC Wednesday.
  • The agency is also not adjusting rules for initial coin offerings, and Clayton underlined that tokens or digital assets used in that fundraising process are securities.

The head of the Securities and Exchange Commission made it clear Wednesday that the agency won't bend the rules for cryptocurrency when it comes to defining what is or what isn't a security.

"We are not going to do any violence to the traditional definition of a security that has worked for a long time," U.S. Securities and Exchange Commission Chairman Jay Clayton told CNBC Wednesday. "We've been doing this a long time, there's no need to change the definition."

Clayton said the U.S. has built a $19 trillion securities market that's "the envy of the world" following the current rules.

See:  Don Tapscott urges ‘sensible’ cryptocurrency regulations

The agency is not adjusting rules for the fundraising process known as initial coin offerings, or ICOs, either, he said. ICOs have raised $9.1 billion this year alone, according to the latest research from Autonomous Next.

"If you have an ICO or a stock, and you want to sell it in a private placement, follow the private placement rules," Clayton said "If you want to do any IPO with a token, come see us."

The SEC is "happy to help you do that public offering" if issuers take the responsibility SEC laws require, he said.

The chairman also addressed a growing debate over which cryptocurrencies should fall under SEC jurisdiction.

"Cryptocurrencies: These are replacements for sovereign currencies, replace the dollar, the euro, the yen with bitcoin," Clayton said. "That type of currency is not a security."

A token, or a digital assets used in a fundraising process known as an initial coin offering, or ICO, are securities by Clayton's definition.

"A token, a digital asset, where I give you my money and you go off and make a venture, and in return for giving you my money I say 'you can get a return' that is a security and we regulate that," Clayton said. "We regulate the offering of that security and regulate the trading of that security."

Whether an asset is a security right now follows the "Howey Test." The ruling comes from a 1946 U.S. Supreme Court case that classifies a security as an investment of money in a common enterprise, in which the investor expects profits primarily from others' efforts.

Clayton made it clear in March that all ICOs constitute securities, and reiterated that Wednesday saying "if it's a security, we're regulating it."

But companies tied to those cryptocurrencies have argued that some should be fall under a different category, in many cases because of their utility.

The financial watchdog has been balancing consumer protection and innovation in what has become multi-billion dollar cryptocurrency market. The market capitalization of bitcoin alone is more than $130 billion, according to CoinMarketCap.

On Tuesday, the SEC picked a new leader for its emerging cryptocurrency division. Valerie Szczepanik, who already worked at the agency, was promoted to a role that didn't exist until this week: Associate Director of the Division of Corporation Finance and Senior Advisor for Digital Assets and Innovation.

Continue to the full article --> here

 


The National Crowdfunding & Fintech Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with cryptocurrency, blockchain, crowdfunding, alternative finance, fintech, P2P, ICO, and online investing stakeholders globally. NCFA Canada provides education, research, industry stewardship, services, and networking opportunities to thousands of members and subscribers and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding and fintech industry. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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Re: OSC Notice 11-780 Statement of Priorities – Request for Comment Regarding Statement of Priorities (the “SofP”) for Financial Year to End March 31, 2019

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NCFA Canada | May 28, 2018

VIA EMAIL

May 28, 2018
Robert Day
Senior Specialist Business Planning
Ontario Securities Commission
20 Queen Street West
22nd Floor
Toronto, Ontario M5H 3S8
Email: rday@osc.gov.on.ca

Re: OSC Notice 11-780 Statement of Priorities – Request for Comment Regarding Statement of Priorities (the “SofP”) for Financial Year to End March 31, 2019

 

Dear Sirs/Mesdames:

The NCFA thanks the OSC for the opportunity to comment on its draft 2018-9 Statement of Priorities (“SofP”).

Summary

We are concerned that the OSC’s laudable commitment to investor protection (“Investor protection is always a top priority for the OSC”) has come to overwhelm the organization’s role, and effectiveness, in fostering fair and efficient capital markets and confidence in capital markets, at least with respect to financial services models and other innovations that are emerging to meet investor and market needs.

As a result, and despite some successes to-date, Ontario is not at the forefront of financial sector innovation. Other jurisdictions, from the United Kingdom to Singapore, have taken a risk-based approach and have focussed equally on the objectives of consumer protection and fair and efficient capital markets. They are now leading both on financial innovation and regulatory innovation, with impressive economic gains to show for it. Sadly, that is not the case in Ontario.

 

Detail

In its Strategic Outlook 2015 - 2017, the OSC states that “Capital raising will be transformed in Ontario through the expansion of the ‘exempt’ market. The OSC will improve access to capital by introducing a suite of changes to the securities regulatory framework that will offer greater opportunity for companies to raise capital without a prospectus and for investors to make investments in those companies (for example, through offering memorandum and crowdfunding exemptions). The OSC will support the transformation of the exempt market in several ways including, for example, by facilitating the registration of crowdfunding portals and the filing of offering memoranda and reports of exempt distributions by issuers who have raised capital in reliance on those exemptions.

“Through its ongoing analysis of exempt market data and supervision of the conduct of dealers, the OSC will assess whether the changes introduced are having the desired impact of giving businesses more options through which to raise capital and giving investors for whom they might be suitable greater access to more diverse investment opportunities.”

Reading between the lines, if this strategic priority was intended to mitigate the threat of overly burdensome regulation which would threaten “fair and efficient capital markets and confidence in capital markets” then the NCFA strongly agrees with this priority. The threat is a serious one.

However, as the NCFA has noted publicly, so far as we are aware, the OSC initiatives within this priority have largely fallen short or failed compared with other jurisdictions and Ontario continues to fall further behind more progressive economies.  (We were unable to locate  the OSC’s assessment of “whether the changes introduced are having the desired impact of giving businesses more options through which to raise capital and giving investors for whom they might be suitable greater access to more diverse investment opportunities”.)

 

Suggestions

The NCFA has argued strongly that overly prescriptive and non-harmonized regulation of start-ups, crowdfunding, and fintech is stifling innovation and sending our entrepreneurs to the US and elsewhere. It seems clear to us that poor regulation of this sector remains a key risk to the OSC’s mandate of fostering fair and efficient capital markets and confidence in capital markets and so requires much stronger action (as we have already advocated in submissions to the OSC).

In the NCFA’s view, the OSC should be urgently prioritizing revamping the regulatory regime together with other CSA regulators in line with (and cooperating with) progressive international regulators. It is also crucial that more and better data be collected, analyzed, and published so that we can see exactly where we are compared to other jurisdictions and year on year.

The collection of better data and analysis would allow the OSC to set performance measures that would help to show, over time, that more start-ups are enabled and supported to the next stage (or not), that capital raising has increased (or reduced) among this cohort, that more (or fewer) entities are being driven out of the jurisdiction, that unjustified compliance costs have been reduced, and so on, compared to other jurisdictions. Simply measuring (how?) perceptions of Ontario as an innovative fintech hub is not enough. And we already know that sandboxes alone will not fix Ontario’s problems in this sector.

Metrics for measuring regulatory and economic outcomes (or at least the development of metrics) should be incorporated into the SofP. These could include:

  • Capital flowing into fintechs
  • Number of listed debt and equity portals and capital raised
  • Company financings via these new mechanisms and successes/failures
  • Loan volumes via these alternative channels, especially to small businesses
  • Time spent to comply with regulatory exemptions
  • Cost($) of compliance.

 

Simply continuing existing work without a proper analysis of what is working and what is not, with proposed next steps to fix the problem, is not good enough.

The NCFA firmly believes that effective strategic planning, a risk-based approach, fact-based decision-making and a defined measurement program (with accountability) is the only workable path towards cost-effective regulatory policy that achieves a balance between multiple objectives. We would be pleased to work with the OSC in the development of robust data collection and metrics for 2018-9.

Thank you for your time.

On behalf of NCFA Canada

Download the submission -->here

Links:

http://www.osc.gov.on.ca/en/Publications_pub_20150618_osc-2015-2017-strategic-outlook.htm

https://www.fca.org.uk/publications/corporate-documents/our-business-plan-2018-19

http://www.conferenceboard.ca/hcp/provincial/innovation.aspx


About NCFA:

The NCFA was established in 2012. Its members are the leading-edge firms and portals dedicated to offering Canadians alternatives to the established financial industry players and supporting innovation and competition in fintech. These alternatives range from debt and equity crowdfunding platforms to companies in the blockchain and cryptocurrency spaces.

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State and Provincial Securities Regulators Conduct Coordinated International Crypto Crackdown

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NASAA | May 21, 2018

Borg: “The actions announced today are just the tip of the iceberg.”

WASHINGTON, D.C. (May 21, 2018) – The North American Securities Administrators Association (NASAA) today announced one of the largest coordinated series of enforcement actions by state and provincial securities regulators in the United States and Canada to crack down on fraudulent Initial Coin Offerings (ICOs), cryptocurrency-related investment products, and those behind them.

NASAA members from more than 40 jurisdictions throughout North America participated in “Operation Cryptosweep,” which to date has resulted in nearly 70 inquiries and investigations and 35 pending or completed enforcement actions related to ICOs or cryptocurrencies since the beginning of May. NASAA members are conducting additional investigations into potentially fraudulent conduct that may result in additional enforcement actions. These actions are in addition to more than a dozen enforcement actions previously undertaken by NASAA members regarding these types of products. Many NASAA members also are conducting public outreach initiatives to warn investors in their jurisdictions of the risks associated with ICOs and cryptocurrencies.

See:  Plowing Ahead: Bermuda Continues Crypto-Friendly Push With Digital ID Partnership

“The persistently expanding exploitation of the crypto ecosystem by fraudsters is a significant threat to Main Street investors in the United States and Canada, and NASAA members are committed to combating this threat,” said Joseph P. Borg, NASAA President and Director of the Alabama Securities Commission.

“Despite a series of public warnings from securities regulators at all levels of government, cryptocriminals need to know that state and provincial securities regulators are taking swift and effective action to protect investors from their schemes and scams.”

In April 2018, NASAA organized a task force of its member state and provincial securities regulators to begin a coordinated series of investigations into ICOs and cryptocurrency-related investment products. Regulators identified many cryptocurrency-related products and as part of its work, the task force identified hundreds of ICOs in the final stages of preparation before being launched to the public. These pending ICOs were advertised and listed on ICO aggregation sites to attract investor interest. Many have been examined and some were determined to warrant further investigation. A number of these investigations are ongoing and others resulted in enforcement actions announced today.

“Not every ICO or cryptocurrency-related investment is fraudulent, but we urge investors to approach any initial coin offering or cryptocurrency-related investment product with extreme caution,” Borg said.

“The actions announced today are just the tip of the iceberg,” Borg said, noting that the task force also found approximately 30,000 crypto-related domain name registrations, the vast majority of which appeared in 2017 and 2018.

A critical component of “Operation Cryptosweep” is raising public awareness of the risks associated with ICOs and cryptocurrency-related investment products.

For more information about ICOs and cryptocurrencies, watch NASAA’s video “Get in the Know About ICOs” or read NASAA’s Investor Advisories: “What to Know About ICOs” and “Be Cautious of the Crypto Investment Craze.”

View the list of Operation Crypto-sweep Enforcement Actions and Activities

 


The National Crowdfunding & Fintech Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with cryptocurrency, blockchain, crowdfunding, alternative finance, fintech, P2P, ICO, and online investing stakeholders globally. NCFA Canada provides education, research, industry stewardship, services, and networking opportunities to thousands of members and subscribers and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding and fintech industry.  Join Canada's Fintech & Funding Community today FREE!  Or become a contributing member and get perks. For more information, please visit:  www.ncfacanada.org

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OSC Investor Alert: BTCReal, BitSerial, Hypercube Ventures LP, CabinCoin OÜ, and BaapPay Inc.

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OSC Release | May 18, 2018

TORONTO – The Ontario Securities Commission (OSC) is warning investors about BTCReal, BitSerial, Hypercube Ventures LP, CabinCoin OÜ, and BaapPay Inc. These firms appear to be involved in schemes that target Ontario investors and encourage them to trade or invest in cryptocurrencies.

BTCReal, BitSerial, Hypercube Ventures LP, CabinCoin OÜ, and BaapPay Inc. are not registered in Ontario to solicit investments or provide advice on investing in, buying or selling securities.

BTCReal manages the website btcreal.biz, where it claims to provide full investment services for cryptocurrency-related investments and forex. BTCReal claims it can provide investors with high returns in short periods of time.

BitSerial operates the website bitserial.io, which claims to offer opportunities to invest in “BTE Tokens.” BitSerial’s website also encourages investors to participate in a lending program where they can exchange Bitcoin, Litecoin, or Ethereum for BTE Tokens that are “lent out” for high returns.

See:  CSA Staff Notice 46-307: Cryptocurrency Offerings

Hypercube Ventures LP manages the websites hypercube.vc, hypercube.fund, vnn.money and vnn.cash, which encourage investors to buy “emission pools” for the purpose of generating “VNN cryptocurrency.”

CabinCoin OÜ operates the websites cabincoin.com and cabincoin.exchange, and is currently advertising an unregistered token sale for “CabinCoin Tokens.” CabinCoin claims that the future value of these tokens will far exceed their initial price.

BaapPay Inc. manages the website baappaytoken.com, and is also currently advertising an unregistered token sale.

Any distribution to an Ontario resident requires a prospectus or exemption from the prospectus requirement, which Bitserial, Hypercube, CabinCoin and BaapPay do not have.

Anyone who has invested in, or had dealings with the above businesses should contact the OSC Inquiries and Contact Centre at 1-877-785-1555 or inquiries@osc.gov.on.ca.

Investors should consider the risks associated with investing in cryptocurrencies, and be aware that the marketing of high returns is often an indication of investment fraud.

Information on common signs of investment fraud, helpful material on cryptocurrency basics and initial coin offerings, and more on Ontarians and cryptocurrencies can be found on the OSC’s investor website GetSmarterAboutMoney.ca.

The mandate of the OSC is to provide protection to investors from unfair, improper or fraudulent practices, to foster fair and efficient capital markets and confidence in the capital markets, and to contribute to the stability of the financial system and the reduction of systemic risk.  Investors are urged to check the registration of any persons or company offering an investment opportunity and to review the OSC investor materials available at http://www.osc.gov.on.ca.

View source:  release


The National Crowdfunding & Fintech Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with cryptocurrency, blockchain, crowdfunding, alternative finance, fintech, P2P, ICO, and online investing stakeholders globally. NCFA Canada provides education, research, industry stewardship, services, and networking opportunities to over 1700+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding and fintech industry.  Join Canada's Fintech & Funding Community today FREE!  Or become a contributing member and get perks. For more information, please visit:  www.ncfacanada.org

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Plowing Ahead: Bermuda Continues Crypto-Friendly Push With Digital ID Partnership

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Forbes | | May 16, 2018

Bermuda’s transition from crypto-nobody to jurisdiction du jour in the space continued to plow ahead Tuesday with the inking of a deal with Shyft, the Toronto-based digital identity provider.

Announced at Consensus 2018, the partnership builds upon the array of new blockchain and initial coin offering-friendly legislation, which was passed recently and awaits the governor’s signature, by laying the groundwork for a progressive ecosystem rooted in sound Know Your Customer practices, which are seen as a critical ingredient to the industry's continued growth.

“The Government of Bermuda has decided to lead the way and build interoperability into the government legislation [to], in essence, approach regulatory frameworks with exportability in mind,” Premier David Burt explained at the signing of the Memorandum of Understanding.

See:  Canadian governments must double-down to foster tech boom here, end brain drain to U.S.

Burt continued:

“This is our Bermuda jurisdiction as a service, the high level of exportability ‘stack’ that includes technology, regulation, process and protocol that we have built with assistance and commitment of modern companies like Shyft with expertise in handling KYC and anti-money laundering compliance.”

Shyft is building a decentralized identity solution designed to collate all of the KYC and AML-related inputs required for a compliant blockchain transaction in a manner that maximizes privacy, enables required attestation and offers verification in a more streamlined and cost-efficient manner than current methods.

“Shyft has an ambitious objective of building a global digital identity ecosystem that gives all citizens the opportunity to participate,” Joseph Weinberg, chairman of Shyft.

“We have a goal of leveraging new technology to make positive and inclusive change. We have found a similar intent and aspiration with the Government of Bermuda.”

No Time To Waste

The announcement comes amid a flurry of activity on the crypto front out of the British territory.

Binance, the world's largest exchange by trading volume, last month announced a similar $15M investment into the island. Further, legislation laying out a framework for regulating digital assets and initial coin offerings is also on the cusp of being enacted.

Speaking on the main Consensus 2018 stage on Monday, Burt wooed the crypto community by touting the island’s desire to provide a stable and friendly regulatory environment for innovators who have been playing cat and mouse games with governments elsewhere. He also highlighted the island's proximity to New York City - just a 90 minute flight.

See:  Crypto Self-Governance Touted as Solution to Regulatory ‘Mess’

Representatives from the Bermudan government and business community were also on hand at the event, many of them conspicuously dressed in Bermuda shorts and knee socks, courting companies seeking a new place to domicile and launch. One representative explained that several ICO projects are currently lined up in the queue and will begin moving ahead formally once the ICO legislation is signed later this month.

Faster Than A Startup

Under the MOU, Shyft will invest up to $10M over three years into the local economy for job creation, workforce training and education in blockchain and related technologies, with the goal of returning repatriating many of the skilled labor that has left the island in recent years in search of work elsewhere.

Bruce Silcoff, CEO of Shyft, said that his aspiration was to promote a “brain gain” effect to Bermuda’s population of 60,000.

Continue to the full article --> here

 


The National Crowdfunding & Fintech Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with cryptocurrency, blockchain, crowdfunding, alternative finance, fintech, P2P, ICO, and online investing stakeholders globally. NCFA Canada provides education, research, industry stewardship, services, and networking opportunities to over 1700+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding and fintech industry.  Join Canada's Fintech & Funding Community today FREE!  Or become a contributing member and get perks. For more information, please visit:  www.ncfacanada.org

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What’s the Difference Between a Regulated ICO and an STO?

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The Merkle | | May 14, 2018

ake a deep breath before you read this. Maybe go get a coffee. We’re going to talk about everybody’s favorite topic – regulation. Regulation is something that splits the crypto world down the middle. It sends many people into a blind fury over quashing innovation, or a heated discourse about the wealthy trying to seize back the power.

Then you have others who believe that regulation – to protect investors – is probably a good thing. But here’s the kicker about regulation. It varies by jurisdiction. There’s a reason Binance moved to Malta, after all.

So, until the world joins hands and comes up with a global solution to the problem, what you read here applies to blockchain companies registered in the United States.

Why Regulation is Needed

Even if the weekly scams, hackings, and general bad behavior don’t stop you from investing in ICOs, you’ll probably grudgingly admit that things are a little out of control.

“There’s a small number of con artists and scammers ruining it for everyone else. No company ever can guarantee 100 percent return on investment. That’s a red flag; that’s the very definition of a scam,” says Darren Marble, CEO of CrowdfundX.

CrowdfundX is a fintech marketing firm that has spent the past three years marketing regulation A+ IPOs to the New York Stock Exchange and the Nasdaq.

And since he so kindly brought the STO acronym to our attention for the first time, it’s only fitting to let him explain it in greater detail in his own words.

What do you say to people who think that regulation will quash innovation?

People read my comments and they think I’m a naysayer and that I don’t believe in crypto, but it’s quite the opposite. We’re partnering with some of the most innovative companies out there because I believe this is the future.

See:  Your guide to cryptocurrency regulations around the world and where they are headed

Can you give us a little background on CrowdfundX and what you do?

We were formed out of a need to help issuers market deals that arose out of the JOBS Act of 2012. That included some securities exemptions and critical changes to Regulation D 506(c) that allow issuers to generally issue or market their deal[s], but restricts them to verified accredited investors.

The JOBS Act was signed in 2012 to make some much-needed changes to security laws that were 80 years old in some cases. But it wasn’t just Regulation D that changed.

The other big exemption was Regulation A+, which allows a private company to raise up to $50 million, generally solicit or market their deal, and raise money from anyone over the age of 18.

So investors anywhere without a high net worth could invest in projects?

Yes, as long as they were over 18.

(That cuts out a sizable chunk of the crypto community).

CrowdfundX and KodakCoin

Can you tell us about KodakCoin and what you do for them?

For the last three years, we’ve marketed 50 percent of all the Reg A+ IPOs in the United States, making us a good candidate for marketing an STO. In January, we signed our first STO client, KodakCoin.

We were approached in 2017 by ICO issuers that wanted help marketing their ICOs. I’ve never felt comfortable with it because I had my own questions and doubts about security laws, whether or not these deals were legal, or if they would be investigated or prosecuted. It turns out my hunch was right.

I think that we’re getting into the market at the right time. A time when ICOs are being investigated and the clamor for regulation is getting louder. And that’s how we landed Kodak. They went out and said, “We’re going to run a compliant ICO.”

See:  Crypto Self-Governance Touted as Solution to Regulatory ‘Mess’

What’s the difference between a regulated ICO and an STO then?

I would say an STO is a better term. ICOs have gotten a bad name. I would encourage any issuer in the US not to use the [term] ICO at all. I think ICO is a dirty word, a tainted word; it has negative connotations and is synonymous with scams. Six months ago, a “compliant ICO” sounded right, but now we need a new term moving away from ICO, which people associate with scams.

So, it’s all in a name? An STO is basically a regulated ICO, rebranded?

An STO is a regulated offering that uses either Reg A +, Reg D 506(c), Reg CF, or registered. So it’s not an STO or Reg A+; it’s an STO using Reg A+ or an STO using Reg D. So, there’s some confusion there… An STO is simply a regulated token offering that registers with the SEC or uses an available securities exemption like Reg A+ to do it.

If you’ve been following the news, you’ll know that KodakCoin finally announced [that] their ICO will take place later this month, after some contentious delays. While you won’t actually hear the term STO mentioned, the delays were due to Kodak seeking a regulated token offering.

They said they wanted to be compliant and they started speaking to the SEC, who wanted to see paperwork; they wanted to know about stuff and started a dialogue. They wanted to see the contract between CrowdfundX and KodakCoin. They slowed down the deal to prioritize investor protection, compliance, and transparency. Unfortunately, that was perceived by some in the media as a red flag, because they were going to launch at the end of January and then had to delay.

If you want to get the blessing of the SEC, it takes time. Regulation takes time.

The bleeding-edge pioneers are paying the price. At some time in the future, these deals will get turned out quickly and there will be precedents and benchmarks. We saw the same thing happen June 2015 when Reg A + went into effect. Companies could legally do a Reg A filing, but no one had ever done it and no one knew how to do it!

How do STOs or regulated ICOs work?

When I say STO, there are people all over the world reading The Merkle and people have different reactions because they’re based in Malta, Singapore, or Australia. But when I’m talking about STOs, I’m specifically referring to a US-based blockchain company that desires to raise a regulated token offering.

See:  The Cryptocurrency Industry Might Actually Benefit From an Ad Ban

The issuer has a few different paths they can follow. They can register with the SEC and do a full-on IPO, which hasn’t happened yet but will happen at some point, or they can use one of several securities exemptions, Reg D 506(c), Reg A+, or Reg CF.

Here’s the Breakdown

Reg D 506(c) is fast, easy and efficient. There is no cap on the raise; you file a form D. But you’re limited to raising money for verified accredited investors.

[With] Reg A+, you can raise up to $50 million, you can solicit or market the deal, anyone over 18 globally can invest. But it’s costly and time-consuming because you have to file with the SEC and have two years of audited financials.

Reg CF is short for Regulation Crowdfunding. You can raise up to $1.07 million over a 12 month period and generally solicit or market the deal. Anyone over 18 can invest and it’s the fastest and cheapest method available. But you’re limited on the amount you can raise.

So those are four paths an STO issuer has. Register, Reg D 506(c), Reg A+, or Reg CF.

What does the difference look like to an investor?

With an ICO, you click through to a landing page and then you can basically send ether to a public wallet, and once your ether is received you get tokens from some deal. That’s pretty seamless.

But in a regulated offering, you have to go through a process of KYC and AML, and that’s to prevent bad actors from investing in a deal. There are more steps that the investor has to go through, and it’s more complicated than sending ether to a public wallet in an ICO.

Regulated ICOs or STOs are more of a mind-bender (and expense) for the company as well. But they have the obvious advantage of complying with the SEC.

(And a few other perks besides.)

Check out:  Don Tapscott urges ‘sensible’ cryptocurrency regulations

So, being regulated allows a company to get past issues like the ad ban? Can they advertise on Facebook, for example?

Any regulated offering allows the issuer to advertise legally, [on] social media and key sites where ICOs are currently not able. The ban has forced issuers to be more creative in terms of how they market and advertise their deals.

You couldn’t market an IPO five years ago the way we’re doing today; you would go to jail. It’s very new. But the very basics are quite simple… don’t lie, cheat, or steal… so if you start there, you’re probably going to be on the right side of the law.

Then from there, there’s a number of nuances, so, in a regulated offering, let’s use a Reg A+, for example. If I’m advertising online, let’s say I’m doing a post on Facebook, the ad has to have a clickable hyperlink to the issuer’s offering circular that has a number of important disclosures that an investor can optionally read and peruse.

Obviously, not all investors will take the time to read a 200-page document… but at a minimum, they’re there to protect investors, they are there to tell them what the risks of getting involved with any type of deal are…

About the ad ban, I don’t think real teams should be concerned. The fact that you can’t advertise on Twitter should not deter you. The rush of investors was last year. Now there are crypto hedge funds – the best deals are being funded by small groups of passionate crypto hedge funds.

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