Based on my understanding and experience in the crypto industry, I strongly agree with Miles Jennings’ advice for startup co-founders to avoid conducting token sales in the United States market due to the complex regulatory landscape and potential legal risks associated with securities classification under U.S. laws.
Startup founders planning token sales should heed a caution from Andreessen Horowitz’s cryptocurrency wing (a16z crypto): it’s advisable to avoid the US market.
“Miles Jenning, general counsel and head of decentralization at a16z crypto, shares that international public sales of equity and tokens, as well as private sales of the same, can be carried out in accordance with securities laws. However, he strongly advises against engaging in public sales within the U.S., referring to it as an own-goal best avoided.”
Jennings pointed out that many initial coin offerings (ICOs) fit the criteria set by the U.S. Securities and Exchange Commission (SEC) for identifying securities, as defined by the Howey test. This test specifies that an investment involves putting money into a collective enterprise with the belief that profits will be generated through the labor or ingenuity of others.
In the context of the Howey test, which distinguishes between investment contracts and mere sales, it is particularly relevant when discussing primary transactions, or direct token sales from issuers to investors. In numerous ICOs (Initial Coin Offerings), these issuers explicitly communicated their intentions to utilize sale proceeds for business operations and provide investors with future profits. A word of caution: such promises may significantly influence the classification of the transaction as an investment contract under securities regulations.
“Those cases were securities transactions regardless of whether the instruments being sold were digital assets or shares of stock. Case closed.”
If classified as a security, issuers must navigate complex registration processes, disclose extensive information, and meet stringent financial standards. Failure to comply can result in significant fines or penalties.
Last July, in a significant court decision, US District Judge Analisa Torres determined that Ripple‘s transactions selling XRP tokens on secondary markets within the US did not amount to security offerings. Conversely, she ruled that Ripple’s sales of XRP to institutional investors in the US met the requirements of the Howey test for securities classification. Ripple is presently challenging a $2 billion penalty imposed by the SEC. In response to heightened regulatory scrutiny, some crypto companies have chosen to stay away from the US market altogether.
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2024-04-25 19:04