On January 18th, the Securities and Exchange Commission (SEC) released a Staff Letter addressed to the Investment Company Institute and the Asset Management Group of the Securities Industry and Financial Markets Association (SIFMA).
The letter outlined the SEC’s concerns about cryptocurrency exchange-traded funds (ETFs). Specifically, the letter stated that there are “significant outstanding questions concerning how funds holding substantial amounts of cryptocurrencies and related products would satisfy the requirements of the [Investment Company Act of 1940] and its rules.”
The letter identified 5 specific areas of concern:
- Potential manipulation and other risks
The letter posed several questions under each area of concern, some of which are: (i) What are the policies and procedures to determine the fair value of cryptocurrency related products? (ii) How would funds classify the liquidity of cryptocurrencies and cryptocurrency related products? (iii) How would the custody requirements be satisfied for cryptocurrency holdings? (iv) How would the fragmented, volatile and high-volume trading characteristics of cryptocurrencies allow ETFs to comply with market price requirements? and (v) How will ETFs ensure investor protection with cryptocurrencies that have a higher opportunity for fraud and manipulation than traditional securities?
The letter concluded by saying the SEC does “not believe that it is appropriate for fund sponsors to initiate registration of funds that intend to invest substantially in cryptocurrency and related products” until the questions in the letter are satisfactorily addressed. The SEC also stated that it has requested that sponsors withdraw registration statements that have already been filed for such products.
The full letter can be found here:
Staff Letter: Engaging on Fund Innovation and Cryptocurrency-related Holdings
On Friday, November 10th StartEngine hosted a summit focused on regulated ICOs.
Check out the Top 10 Highlights from the event:
- Management and company counsel might need to consult with local legal counsel in other countries to ensure compliance with rules and regulations of other countries. The level of compliance requirements might ultimately result in eliminating countries from the token offering. For those countries that do not get eliminated, be sure to include relevant disclosures by country (and state).
- There are several possible federal exemptions and securities regulations that can be used, such as 506(c), the Crowdfunding regulation, Regulation A+, and Regulation S. If you’re relying on more than one, be sure you’re complying with the requirements of each, as they may be different. Also, be careful to also comply with state securities exemption requirements, if necessary.
- In order to comply with the advertising rules for US and non-US investors, consider having the tokens sold in the US be different from tokens sold to foreign investors.
- Company should consider as a risk factor what the implications are if their token cannot handle the large number of users at the end of their token sale.
- “Curb your enthusiasm”, meaning what you say today in marketing and advertising can be used against you later.
- When determining whether an investor is accredited, go beyond just a questionnaire. Get bank statements or a letter from their accountant to verify income.
- The variety of possible exemptions and securities regulations all have different resale restrictions to be considered and complied with during token sales.
- Be extra diligent when doing your know your customer (KYC) and anti-money laundering (AML) checks.
- Some investors think there is too much emphasis on who the Company’s advisors are during an ICO. Instead, the focus should be on identifying for investors: (1) who is on the management team? (2) what is the opportunity? (3) what is the smart contract code itself and has it been audited? (4) what is the overall marketplace analysis? and (5) what is the company’s expectation for the use of proceeds?
- Investors should have engineers and coders on their team to look at the smart contract code during diligence.
If you missed the event or for more information visit: https://www.startengine.com/ico
The California Secretary of State’s office announced this week that statements of information for California limited liability companies (LLCs) can now be filed online.
Secretary of State Alex Padilla said the goal with implementing this online service for LLCs is to streamline the process so that “entrepreneurs can focus less on red tape and more on growing their business.” Corporations already had the ability to file statements of information online, but previously the statements of information for LLCs had to be mailed into the Secretary of State’s office.
As a reminder, statements of information are due 90 days after initial formation and every 2 years thereafter. They also require interim statements of information if any information needs to be updated.
The new online form can be accessed here: https://llcbizfile.sos.ca.gov/.
See the full press release here: http://www.sos.ca.gov/administration/news-releases-and-advisories/2017-news-releases-and-advisories/secretary-padilla-announces-llc-statements-information-can-now-be-filed-online-and-new-bizfile-california/.