Carol R. Goforth (University of Arkansas – School of Law) has posted “Regulation of Crypto: Who is the SEC Protecting?” (American Business Law Journal (2021 Forthcoming)) on SSRN. Here is the abstract:
Just months apart in 2020, two judges from the Southern District of New York wrote incredibly important opinions concerning the SEC’s approach to regulating the sales of cryptoassets. In both SEC v. Telegram and SEC v. Kik, the court concluded that the way in which a large, reputable social media company had gone about conducting its SAFT and crypto offerings violated federal law by amounting to an unregistered, non-exempt sale of securities. In neither case was fraud or other criminal conduct an issue; the sole problem identified by the courts was failure to register the sales. In reaching their conclusions, both courts collapsed a two-phase offering into a single, integrated scheme. The problem with this approach is that this appears to be an unnecessarily overbroad application of the SEC’s regulatory authority, falling outside the commission’s mandate to protect investors and markets. The cost of this approach is that crypto entrepreneurs are being forced away from the U.S., and American investors are denied opportunities to participate in a potentially exciting and desirable technological revolution
This Article examines the underlying regulatory framework, the SEC’s stated approach to crypto, and the rationale employed in these two recent opinions. It also considers the potential impact of recent amendments to the SEC’s rules defining the “integration doctrine,” which was explicitly relied upon in the Kik decision in order to treat the contractual sales and the eventual token sales as a single scheme that violated the federal securities laws. This Article makes suggestions for how crypto entrepreneurs and their advisors might structure future crypto offerings to avoid the pitfalls created by the Kik and Telegram opinions. This Article certainly advocates that courts limit the approach that is being urged by the SEC, but the suggestions offered here do not depend on a change in the law, merely a change in understanding what is required in order to conduct a compliant crypto offering.