On November 2, 2020, the Securities and Exchange Commission adopted amendments intended to ease the rules for certain exempt offerings. These changes include increasing the annual cap on equity crowdfunding from $1.07 million to $5 million, raising the annual cap on Reg A+ offerings from $50% million to $75 million, raising the maximum offering amount for Rule 504 of Regulation D from $5 million to $10 million, and expanding the “test-the-waters” accommodation to Regulation Crowdfunding issuers.
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Securities Law
Issues Regarding SEC Proposal to Expand Private Offering Exemptions
The Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), was promoted as a new piece of legislation creating groundbreaking additional pathways to funding for companies, which was especially highlighted by the 2008 financial crisis. Two provisions in the JOBS Act, created “Regulation” crowdfunding and “Reg A+” offerings, were particularly focused on early stage and emerging growth companies’ financing needs.
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With the SEC, Cooperation is Key
As an expensive “slap on the wrist,” the Securities and Exchange Commission (“SEC” or the “Commission”) recently concluded that approximately $12.7 million worth of funds raised in a 2017 Initial Coin Offering (“ICO”) by Gladius Network LLC (“Gladius”) were part of an unregistered securities offering, and all proceeds must be returned to investors. However, the penalty to Gladius for their regulatory violations was zero.
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SEC Expands the Definition of “Smaller Reporting Company”
This article was originally posted to the Corporate and Securities Law Blog on July 12, 2018.
On June 28, 2018, the U.S. Securities and Exchange Commission (the “SEC”) adopted amendments to the definition of “smaller reporting company” which expand the number of companies that qualify as smaller reporting companies and can thereby take advantage of the scaled disclosure requirements applicable to such companies. The amendments to the definition of “smaller reporting company” will be effective on September 10, 2018.
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New Law Requires SEC to Expand Regulation A+ To Exchange Act Reporting Companies
On May 24, 2018, President Donald J. Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”). The Act, which primarily focuses on rolling back certain regulatory provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, also contained a significant change in the law for companies looking to undertake securities offerings in reliance on the revamped Regulation A (commonly referred to as “Regulation A+”) under the Securities Act of 1933.
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Crypto-Crime: The SEC and DOJ Go After BitFunder and Its BitFounder
Taking further steps into the world of cryptocurrency, two entities of the federal government recently took legal action against BitFunder, a now-defunct Bitcoin exchange, and its founder, Jon Montroll. The Securities and Exchange Commission filed civil charges against BitFunder and Montroll, and the U.S. Attorney’s Office in Manhattan brought criminal charges of perjury and obstruction of justice against Montroll, who was arrested and taken into custody. BitFunder was an exchange that, among other things, empowered its customers to create and trade Bitcoin denominated shares of enterprises. The numerous allegations and charges against the defendants include:
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When Does Software Become Securities?
The SEC Munchee Order and Chairman’s Statement
On December 11, 2017, the U.S Securities and Exchange Commission (“SEC”) issued a cease and desist order (“Order”) against Munchee, Inc.’s (“Munchee”) $15 million Initial Coin Offering (“ICO”). The SEC determined that the tokens were investment contracts, and thus securities, primarily because a purchaser of the tokens would have had a reasonable expectation of obtaining a future profit based upon Munchee’s efforts, including Munchee revising its app and creating an “ecosystem” using the proceeds from the sale of the tokens. On the second day of sales of MUN tokens, the company was contacted by SEC staff. Munchee determined within hours to shut down its offering, did not deliver any tokens to purchasers, and returned to purchasers the proceeds that it had received. For a detailed description of the Order, please see our previous blog post here. The SEC chairman, Jay Clayton, concurrently issued a public statement (“Statement”) expressing his general views on the cryptocurrency and ICO markets. It should be noted that the Order does not have the weight of a federal court decision. Munchee consented to the Order without admitting or denying any of the findings therein. Furthermore, the Statement is personal to the chairman, and “does not reflect the views of any other Commissioner or the Commission.” That said, the Order and the Statement provide us with the SEC’s assessment and chairman’s perspective as to whether ICOs constitute the sale of securities, and how to conduct an ICO without running afoul of securities laws.
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At Last! Relaxation of Federal Securities Regulations for Private Company Stock Incentive Awards may be on the Horizon
Many privately held companies rely on equity compensation awards (typically stock options) to recruit, retain and motivate key employees and other service providers. The issuance of such equity compensation awards generally needs to comply with, among other things, federal securities laws. Most commonly, private company issuers of equity compensation awards rely on federal Rule 701 which provides an exemption from the registration requirements of the Securities Act of 1933.
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The SEC and ICOs: Putting the SEC’s Determination that DAO Tokens are Securities in Context
On July 25, 2017, the U.S. Securities and Exchange Commission (“SEC”) issued a report (“Report”) detailing its investigation into whether the DAO (an unincorporated “decentralized autonomous organization”), Slock.it UG (“Slock.it”), Slock.it’s co-founders, and intermediaries violated the federal securities laws. The SEC determined that the tokens issued by the DAO are securities under the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”), and advised those who would use a distributed ledger or blockchain-enabled means for capital raising to take appropriate steps to comply with the U.S. federal securities laws. However, the SEC decided not to pursue an enforcement action at this time.
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SEC Declares That Initial Coin Offerings (ICOs) May Be Securities; Finds DAO a Security
The SEC has opined that, depending on the facts and circumstances of each individual ICO, the virtual coins or tokens that are offered or sold may be securities. If they are securities, the offer and sale of these virtual coins or tokens in an ICO are subject to the federal securities laws.
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SEC Prevails in Regulation A+ Litigation
Regulation A+, which became effective on March 25, 2015, permits the offering of up to $50,000,000 in securities in any twelve-month period, subject to the certain requirements (a “Tier 2 Offering”). Tier 2 Offerings are not subject to state securities laws registration and qualification requirements due to federal preemption provided by Section 18 of the National Securities Market Improvement Act of 1996 (NSMIA) because such securities are offered or sold to a “qualified purchaser” (as defined by the Commission).
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