Have you advised any clients on ICOs? If not, can you recommend law firms that are providing good guidance in this area?
Yes, I do. It's a commendable attempt at making the square peg of the new crypto technologies fit in the round hole of current regulation. I share Michael Casey's views on it here: https://www.coindesk.com/saft-falls-short/. "Under a SAFT, it's wealthy investors that gain ground-floor entrance to the startups that may become the Googles, Facebooks and Amazons of the future, not regular Joes in flyover states." On the technical level, there are also several known problems with it, which Jonathan Rohr and Aaron Wright have articulated here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3048104, and, together with other legal experts, here: https://cardozo.yu.edu/sites/default/files/Cardozo%20Blockchain%20Project%20-%20Not%20So%20Fast%20-%20SAFT%20Response_final.pdf. The above two papers argue very convincingly that: - The use of the SAFT is analogous to a forward contract, whereby the issuer sells tokens ahead of time to a buyer in the future. - However, it is unclear whether the SAFT will limit the risk that a token issued under the SAFT is deemed a security. When the issuer delivers the tokens to SAFT holders, the underlying token will still need to be evaluated under Howey’s test for an investment contract, and it may end up being deemed a security. - If tokens are in fact deemed securities, it would create complications for the issuer. Because the issuer sold these tokens pursuant to Rule 506(c) [a special regime under SEC regulations that imposes some rather strict limitations], if these tokens are characterized as securities, they will need to be sold as restricted securities and will need to somehow include a legend outlining the terms of the restrictions. - Assuming restricted legends can somehow be imprinted or associated with these tokens, purchasers will have limited avenues to transfer these “restricted tokens” once sold. Tokens will need to be held by purchasers for a holding period, and they can be transferred only pursuant to certain limited exceptions under other securities exemptions. Conclusion: the strict restrictions under the chosen regulatory regime would defeat the purpose of tokens that are supposed to be freely exchangeable and fungible. This is not investment advice. Just trying to convey that there are a lot of nuances, and we're completely new territory. Nobody has the right answer. The following is advice: do your own research, and do not rely on expensive law firms. Nobody has a clue, because there are no bright lines in this area of the law.
Anonymous
asked
Juan Llanos
Have you advised any clients on ICOs? If not, can you recommend law firms that are providing good guidance in this area?
In particular, wondering the scope of the legal work that needs to go into supporting a REPUTABLE ICO?
Yes, I have. Several selected ones whom I get to know and trust after a series of conversations and considerable research (what everyone should do, I might add).
I cannot recommend anyone because this is new territory and the legal opinions so far rendered have yet to be tested in court.
Nobody can claim to be an expert (let alone junior lawyers that did not know what money transmission was four years ago). It all depends on the risk appetite of the client, and the open-mindedness and forethought of the advisor. And on everyone's reading comprehension and research skills, of course.
Anonymous replied:
Do you have perspective on SAFT & the SAFT Project: https://saftproject.com/ ?
Yes, I do. It's a commendable attempt at making the square peg of the new crypto technologies fit in the round hole of current regulation. I share Michael Casey's views on it here: https://www.coindesk.com/saft-falls-short/. "Under a SAFT, it's wealthy investors that gain ground-floor entrance to the startups that may become the Googles, Facebooks and Amazons of the future, not regular Joes in flyover states." On the technical level, there are also several known problems with it, which Jonathan Rohr and Aaron Wright have articulated here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3048104, and, together with other legal experts, here: https://cardozo.yu.edu/sites/default/files/Cardozo%20Blockchain%20Project%20-%20Not%20So%20Fast%20-%20SAFT%20Response_final.pdf. The above two papers argue very convincingly that: - The use of the SAFT is analogous to a forward contract, whereby the issuer sells tokens ahead of time to a buyer in the future. - However, it is unclear whether the SAFT will limit the risk that a token issued under the SAFT is deemed a security. When the issuer delivers the tokens to SAFT holders, the underlying token will still need to be evaluated under Howey’s test for an investment contract, and it may end up being deemed a security. - If tokens are in fact deemed securities, it would create complications for the issuer. Because the issuer sold these tokens pursuant to Rule 506(c) [a special regime under SEC regulations that imposes some rather strict limitations], if these tokens are characterized as securities, they will need to be sold as restricted securities and will need to somehow include a legend outlining the terms of the restrictions. - Assuming restricted legends can somehow be imprinted or associated with these tokens, purchasers will have limited avenues to transfer these “restricted tokens” once sold. Tokens will need to be held by purchasers for a holding period, and they can be transferred only pursuant to certain limited exceptions under other securities exemptions. Conclusion: the strict restrictions under the chosen regulatory regime would defeat the purpose of tokens that are supposed to be freely exchangeable and fungible. This is not investment advice. Just trying to convey that there are a lot of nuances, and we're completely new territory. Nobody has the right answer. The following is advice: do your own research, and do not rely on expensive law firms. Nobody has a clue, because there are no bright lines in this area of the law.