Cryptocurrency & the SEC

When its sale is an investment contract under Howey: money invested in a common enterprise with an expectation of profit from the efforts of others. The SEC staff's 2019 framework translates that into facts. A token sold before its network works, with proceeds used to build it, by a team whose continued effort the buyers are counting on, is very likely a security however it is labeled. A token on a functioning network, acquired for use rather than investment, with no promoter promising to raise its value, may not be. The analysis is done on the facts at the time of each sale, and the same token can be a security in a 2021 presale and not one in a 2026 secondary trade.

Section 5 applies to every offer and sale of a security, so the real question is which exemption the offering fits. Rule 506(c) allows general solicitation if every purchaser is a verified accredited investor, with a Form D filed within 15 days of the first sale. Regulation A Tier 2 permits sales to the public up to $75 million after the SEC qualifies a Form 1-A, and carries ongoing reports. Regulation Crowdfunding caps at $5 million through a registered portal. Regulation S covers offshore sales to non-US persons with resale restrictions of up to one year. If the token is not a security, none of this applies, which is why the classification memo comes first.

The SEC has increased enforcement activity against projects alleged to have fallen short of registration and disclosure requirements. We represent companies in matters before the SEC, including investigations and enforcement actions, and advise on disclosure, document preservation, and response strategy. We act for the company throughout; the agency has its own lawyers.

Because the remedies attach to the sale, not to the intent. A sale of unregistered securities gives each purchaser a rescission right under Section 12(a)(1) for one year, which means the issuer can be required to return the purchase price with interest to anyone who asks, in a falling market. The SEC can add disgorgement, penalties and an injunction. Exchanges and custodians will not list a token with an open registration question, and acquirers price it as a liability. Settling the question before the sale costs a memo. Settling it after the sale costs the sale.

They depend on the path taken. A Regulation D issuer amends its Form D for material changes and annually while the offering continues, and its tokens stay restricted under Rule 144 for six months or a year. A Regulation A Tier 2 issuer files an annual report on Form 1-K, a semiannual report on Form 1-SA and current reports on Form 1-U. Any issuer whose security comes to be held of record by 2,000 persons while its assets exceed $10 million faces Exchange Act registration under Section 12(g), with Forms 10-K and 10-Q to follow. A project that promised decentralization also has to keep the record that shows it happening.

Write the Howey memo before the sale and follow it. Choose an exemption and keep its paperwork: the verification files under Rule 506(c), the Form D within 15 days, and the Regulation S legends and resale restrictions enforced in the token contract. Review every public statement about the token against the offering documents, since a founder's post about price is a securities communication whether or not anyone meant it to be. Preserve documents from the first inquiry, and if a subpoena arrives, answer through counsel with productions scoped to the request. The SEC's cooperation framework credits self-reporting and remediation, and the credit is real, but it is available only before the staff finds the problem on its own.