BitOoda Regulatory Analysis, 11/16/20: SEC Rule Changes Lay Groundwork for Advancement of Tokenization
We at BitOoda believe that capital markets are in the process of evolving from analog to digital, and that the global financial system ultimately will be largely blockchain-based. The growth of tokenization and regulated stablecoins (including CBDCs) will increasingly shape the direction of the global economy. Our expansion into digital securities — as one of the first U.S. firms approved to provide investment banking advisory and placement agent services for digital security issuers, and to broker digital asset securities in the secondary market — is consistent with this thesis and reflects our lead role in the development of a compliant digital security framework here in the U.S.
At the same time, we have written about the SEC’s “regulation by enforcement” approach and the agency’s failure to coordinate a comprehensive and logical digital asset regulatory framework. We have analyzed the SEC’s consistent crackdown on ICOs, its recent actions against Telegram and Kik, and its internal inconsistencies and ambiguities on token classification questions, despite some recent statements and no-action letters indicating its openness to integrating digital assets into U.S. securities regulations.
As we watch some of the agency’s recent actions outside the digital asset arena, we wanted to consider how some of these policy changes will shape the crypto space in the longer term. Specifically, we assess that this summer’s update of the accredited investor definition and this month’s approval of a revised exempt offering framework have the potential to advance the development of a compliant digital security framework.
· The definitional amendments expand the list of entities that may quality as accredited investors and allow individuals to qualify as accredited investors based on professional knowledge, experience or certifications in addition to income or net worth. While the expanded definition of accredited investor will broaden the pool of potential investors for private offerings of digital asset instruments, it also could benefit future security token offerings by providing greater inclusion for new investors and entities.
· The changes to the exempt offering framework are intended to promote capital formation and expand investment opportunities by streamlining the exemption rules, increasing the offering and investment limits for several types of offerings, and simplifying the communications and disclosure requirements.
The improvements to the exempt offering framework have the potential to facilitate digital asset issuers’ ability to conduct complaint security token offerings by raising the limits for Reg A, Reg CF, and Rule 504 offerings, and increasing or eliminating individual investor limits for Reg CF offerings. While not necessarily opening the floodgates for token offerings of all shapes and sizes, the changes provide relief for companies looking to raise sufficient funds to fully develop and launch their token networks.
Moreover, what these changes suggest — particularly when coupled with pro-crypto comments from leaders such as Commissioner Hester Peirce — is that the Commission’s view of the security token space and its willingness to modernize its framework to enable and integrate digital assets into existing securities rules is evolving. As we at BitOoda continue to blaze new pathways forward in the development of compliant capital markets solutions, we will continue to focus on tokenization as a key element in the digitization of the financial system and area of opportunity for our clients. If you are a company or fund looking to raise capital, a developer or foundation launching a security token, or an investor looking for entry points into the digital securities ecosystem, please consult with us and explore how to leverage our expertise and our regulatory stack to navigate and take advantage of the SEC’s efforts to modernize its policies and rules for the digital economy.