On June 11, 2021, the Securities and Exchange Commission (SEC) released its 2021 regulatory agenda, listing the agency’s planned regulatory priorities and actions for 2021. While the list included expected rulemaking areas such as ESG disclosure, market structure modernization, unfinished work from Dodd-Frank, and SPACs, noticeably absent were any efforts related to crypto. Gensler was quoted as stating that “the SEC has a lot of regulatory work ahead of us” and that the rulemaking efforts would further the SEC’s mission to “strengthen our markets, increase transparency, and safeguard investors”.

Given the intense speculation and build up to Gensler’s appointment due to his interest and familiarity with blockchain, this move can only be interpreted as, “He’s Just Not That Into You,” from Gensler. This was understandably an immense let down from a regulator with an enforcement-driven tenuous relationship with the digital assets industry. This comes at a point when the SEC engagement with the crypto marketplace has lulled, reduced to a slow leak of ongoing enforcement actions, the vast majority from the 2017-2018 ICO era. The more recent enforcement actions do not even leave much for the tea leaf readers to read, lacking any coherent messaging, and seeming more like an indiscriminate sweep of years old actions in the space. Outside of the outright fraud cases, 2021 has brought the following actions so far:

SEC v. Brown, et al.

(5/28/2021)

Synopsis: Promoters for a digital asset offering charged as unregistered broker-dealers for marketing and promoting the project.

SEC Description: The SEC filed an action against five individuals alleging that they promoted a global unregistered digital asset securities offering that raised over $2 billion from retail investors.  According to the SEC's complaint, filed in the United States District Court for the Southern District of New York, from approximately January 2017 to January 2018, BitConnect used a network of promoters, including U.S.-based Trevon Brown (a.k.a. Trevon James), Craig Grant, Ryan Maasen, and Michael Noble (a.k.a. Michael Crypto) to market and sell securities in its "lending program." The SEC's complaint alleges that these promoters offered and sold the securities without registering the securities offering with the Commission, and without being registered as broker-dealers with the Commission, as required by the federal securities laws.           

SEC v. LBRY, Inc.

(3/29/2021)

Synopsis: One of the more aggressive enforcements to date given that LBRY did not ICO and given that it did not conduct an initial coin offering to fund the business, and tokens were being mined and used on the network well before the company sold tokens to invest in the network.

SEC Description: The SEC charged LBRY, Inc., a blockchain company, with conducting an unregistered offering of digital asset securities. According to the SEC's complaint, from at least July 2016 to February 2021, LBRY, which offers a video sharing application, sold digital asset securities called "LBRY Credits" to numerous investors, including investors based in the US. LBRY allegedly received more than $11 million in U.S. dollars, Bitcoin, and services from purchasers who participated in its offering.

SEC v. Coinseed, Inc., et al.

(2/17/2021)

Synopsis: Charged the company and its CEO with conducting an unregistered securities offering of tokens raising around $141,410 in sales of CSD tokens, which entitled holders to profits interests obtained from hundreds of unique digital asset wallets, the vast majority of which were linked to unique email addresses, suggesting that hundreds of investors participated in the offering.

SEC Description: The SEC charged Coinseed, Inc., a company that purported to offer a mobile investment application that enabled users to invest in digital assets, and its co-founder and CEO, in connection with Coinseed's offer and sale of digital asset securities.

Wireline, Inc.

(1/15/2021)

Synopsis: Again, this seems more of an aggressive enforcement action, the SEC is accusing Wireline of failing to meet the requirements of 506(b) in raising money from 28 investors, “ some based in the United States” because they sent an email to “a large number of people, many of them were not well known to Wireline,” which the SEC said amounted to a public solicitation and cost them their exemption from registration.

 

SEC Description: The SEC filed a settled cease-and-desist proceeding against financial technology company Wireline, Inc. for making materially false and misleading statements in connection with an unregistered offer and sale of digital asset securities.

Tierion, Inc.

(12/23/20)

Synopsis: SEC requires the company to disable trading and transfers in their token, among other remedies, from a fairly standard ICO using public solicitation and an advisory firm to conduct a token sale, which was accessible to investors in the U.S. and worldwide where approximately 350 million TNT (tokens) were sold to approximately 4,800 people, including people in the United States, raising approximately $25 million.

 

SEC Description: The SEC filed a settled cease-and-desist proceeding against Texas-based blockchain startup company Tierion, Inc. for conducting an unregistered offering of securities in the form of a "token sale." Tierion has agreed to return funds to harmed investors, pay a $250,000 penalty, and disable trading in its "tokens."

As highlighted in the actions above, the SEC continues to broadly sweep up from 2017 and 2018, even on relative foot faults and small offerings, in an attempt at leaving no token offering unchecked, all while the space has evolved in immeasurable ways, creating new and novel products and business models in a guidance vacuum. The recently released regulatory agenda seems to add to the further breakdown in relations between the SEC and the digital asset industry. The lack of attention to creating guidance and guardrails signals the promise of more enforcement and little in the way of proactive engagement.

The reaction to the 2021 agenda from Commissioners Hester Peirce and Elad Roisman is broadly applicable to the SEC’s approach to the space. Given the SEC’s inherent bandwidth limitations, the priorities listed amount to a “regrettable decision to spend [these] scarce resources… rehashing newly completed rules” as opposed to addressing “some other important rulemakings, including rules to provide clarity for digital assets.” The lack of proactive regulatory engagement combined with the continued street sweeping approach on enforcement for years’ old fact patterns, leave the space with nothing to go on. The SEC has been dark otherwise and overly aggressive in its pursuit of projects in the industry, no longer carefully selecting enforcement in an effort to dictate market behavior. Instead, the SEC looks like a hammer looking for anything to nail with LBRY (which is fighting the SEC enforcement action) and crosses the finish line years late on ICO marketers as broker dealers, a widespread practice in 2017 and 2018 long believed to be problematic.

The SEC has also gotten increasingly aggressive in the remedies it seeks, requiring projects to disable trading in their tokens and causing proximate harm to retail. While many are generally unsympathetic towards Ripple, they have raised a fair notice defense, asking the court to dismiss the action due to the fact that the SEC allowed the project to run for years, while “countless market participants for years transacted in XRP believing it was not an investment contract.” While this is likely not a winning argument in court, it represents a significant toxicity in the crypto market’s relationship with the SEC. In what may become a cyclical problem for the crypto space, we have standard market behaviors over a three-year period going unredressed only to be subject to a catch-up cycle of enforcement once projects have reached significant scale and retail participants have adopted the new technologies and products and are at most risk of economic harm from enforcement actions. 


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