cryptocurrency legal roundup – securies, derivaves

CryptocurrencyLegalRoundup–Securi5es,Deriva5ves,Enforcementand

Li5ga5onUpdates

June12,2019InvestmentNetwork’sDigitalAssetsWorkingGroupChicago,IllinoisThispresenta,onisforeduca,onalpurposesonly.Itshouldnotbeconstruedaslegaladviceoropinionorasasubs,tutefortheadviceofcounsel.

©2019StradleyRononStevens&Young,LLP

FirstofitsKindWhitePaperonDigitalAssetsandCrypto-Currencies

DigitalandDigiAzedAssets:

FederalandStateJurisdicAonalIssues

PreparedBy:

AmericanBarAssociaAonDerivaAvesandFuturesLawCommiKee

InnovaAveDigitalProductsandProcessesSubcommiKeeJurisdicAonWorkingGroup

“OurgoalwastoprovidearesourceandanalyAcalframeworkforconsideringthebroadrangeofissuesraisedbythesenewtechnologies.WehopethattheWhitePaperwillprovetobeavaluableresourceforlegalpracAAonersandotherswhoareacAveinthedigitalassetarena,aswellasforpolicymakers.”©2019StradleyRononStevens&Young,LLP 2

ComprehensiveSurveyoftheRegula5onofCrypto-CurrenciesandOtherDigitalAssetsatBoththeFederalandStateLevels 1.  DigitalAssetsandBlockchainTechnology2.  CommodityExchangeActandCFTCRegulaAon

3.  FederalSecuriAesRegulaAon:SecuriAesActandExchangeAct

4.  FederalSecuriAesRegulaAon:InvestmentCompanyActandInvestmentAdvisersAct

5.  TheNeedforaBeKerCFTCandSECRegulatorySchemeforDigitalAssets

6.  FinCENRegulaAon

7.  InternaAonalRegulaAonofDigitalAssetsandBlockchainTechnology

8.  StateLawConsideraAons

Appendix:50-StateVirtualCurrencyRegulaAonSurvey

©2019StradleyRononStevens&Young,LLP 3

TheHoweyTest-forInvestmentContractsAninvestmentcontractexistswhenthereis:

1.  aninvestmentofmoney

2.  inacommonenterprise

3.  withareasonableexpectaAonofprofits

4.  tobederivedfromtheeffortsofothers


“HoweyTest”GoogleSearchesTrends


“HoweyTest”GoogleSearchConcentra5onbyState


HinmanSpeech(June2018)§  “Security”statusofadigitalassetcanchangeoverAme-adigitalassetmaystartoutasaninvestmentcontractandthentransformintoamediumofexchangetopurchasegoodsorservicesontheplacorm

§  KeytransformaAvedevelopment-decentralizaAon(awayfromcentralizaAon)

§  Etherisnotasecurity(evenifitoncewas)


November2018JointStatement

(CorpFin;IM;TradingandMarkets)Beyondfraudand1933ActregistraAon-pathtocompliance

withpanoplyofsecuriAeslaws§  AirfoxandParagon-1934ActregistraAon

§  CAM-thetwo1940Acts:

•  InvestmentvehiclesthatholddigitalassetsecuriAesandthosewhoadviseothersaboutinvesAngindigitalassetsecuriAes,includingmanagersofinvestmentvehicles,mustbemindfulofregistraAon,regulatoryandfiduciaryobligaAonsundertheICAandIAA.

§  EtherDelta-1934ActregistraAonofexchanges

§  TokenLot-BrokerdealerregistraAon


FinHubFrameworkfor“InvestmentContract”AnalysisofDigitalAssets(April3,2019)

§  BasedonHoweyTest

•  DeterminaAveelementisreasonableexpectaAonofprofitsderivedfromeffortsofothers

§  Collectspriorcases,speeches,andguidanceinoneplace

§  Introducesnewterm–AcAveParAcipants(APs)

•  AP=promoter,sponsor,orotherthirdparty(oraffiliatedgroupofthirdparAes)

§  Addscolorand(extensive)detail,withexamples(the“characterisAcs”)

§  ConsideraAonsforre-evaluaAonofstatus

§  Accompaniedbyfirstdigitalassetsno-acAonleKer


ReasonableExpecta5onofProfits(orotherFinancialReturns)DerivedfromEffortsofOthers

Generalprinciples§  ExpectaAonoffinancialreturnscanbebasedon:•  ParAcipaAngindistribuAonsor•  Sellingatagaininthesecondmarketor•  OthermethodsofrealizingappreciaAonontheasset

§  Thiscomponentismetwhen:•  AnAcAveParAcipant(AP)providesessenAalmanagerialeffortsthataffectthesuccessof

theenterpriseand•  Investorsreasonablyexpecttoderiveprofitfromthoseefforts

§  ObjecAveinquirythatlooksto:•  ThetransacAonitselfandits"economicreality”•  The“charactertheinstrumentisgivenincommercebythetermsoftheoffer,theplanof

distribuAon,andtheeconomicinducementsheldouttotheprospect"

•  Themannerinwhichthedigitalassetisofferedandsold


RelianceontheEffortsofOthersTwokeyissues:§  DoesthepurchaserreasonablyexpecttorelyontheeffortsofanAP?

§  Arethoseefforts“theundeniablysignificantones,thoseessenAalmanagerialeffortswhichaffectthefailureorsuccessoftheenterprise,”asopposedtoeffortsthataremoreministerialinnature?


Characteris5cs-RelianceontheEffortsofOthersStrongpresenceofthefollowingcharacterisAcsindicatesapurchaser’srelianceonthe“effortsofothers:”§  AnAPisresponsibleforthe(ulAmate)funcAonalityofthenetwork:•  InparAcularwhereanAPpromisesfurtherdevelopmentaleffortsinorderforthedigital

assettoaKainorgrowinvalue;•  EssenAaltasksaretobeperformedbyAPvs.adecentralizednetwork(anunaffiliated,

dispersedcommunityofnetworkusers).

§  AnAPcreatesorsupportsamarketfor,orthepriceof,thedigitalasset,e.g.,anAP:•  controlsthecreaAonandissuanceofthedigitalasset;or•  takesotheracAonstosupportamarketpriceofthedigitalasset,suchasby

limiAngsupplyorensuringscarcity,through,forexample,buybacks,"burning,"orotheracAviAes.

§  AnAPhasaleadorcentralroleinthedirecAonoftheongoingdevelopmentofthenetworkorthedigitalasset,inparAcular,playsaleadorcentralroleindeciding:•  governanceissues;•  codeupdates;or

•  methodofthirdpartytransacAonvalidaAon.©2019StradleyRononStevens&Young,LLP 12

Characteris5cs-RelianceontheEffortsofOthers§  AnAPhasaconAnuingmanagerialroleinmakingdecisionsaboutorexercisingjudgment

concerningthenetworkorthecharacterisAcsorrightsthedigitalassetrepresentsincluding,forexample:•  CompensaAondecisions(forthird-partyserviceprovidersorpersonschargedwithoversightofthenetwork).

•  Tradingdecisions(arrangingforasecondarymarketorplacormtoprovideliquidity).

•  DeterminingwhowillreceiveaddiAonaldigitalassetsandunderwhatcondiAons.

•  Manageriallevelbusinessdecisions,e.g.,useofproceedsfromsalesofthedigitalasset.

•  ValidaAonorconfirmaAonmethodology(orotherresponsibilityfortheongoingnetworksecurity).

•  Othermanagerialdecisionsthatwilldirectlyorindirectlyimpactthesuccessofthenetworkorthevalueofthedigitalassetgenerally.

§  APeffortstopromoteitsowninterestsandenhancethevalueofthenetworkordigitalassetarereasonablyexpected,forexample:•  APhastheabilitytorealizecapitalappreciaAonfromthevalueofthedigitalasset(throughownership

interestinthedigitalasset).

•  APdistributesthedigitalassetascompensaAontomanagementortheAP'scompensaAonisAedtothepriceofthedigitalassetinthesecondarymarket.

•  TheAPownsorcontrolsownershipofintellectualpropertyrightsofthenetworkordigitalasset.

•  APmoneAzesthevalueofthedigitalasset,especiallywherethedigitalassethaslimitedfuncAonality.


EffortsofOthers-Re-evalua5onFactorsForuseinevaluaAngwhetheradigitalassetpreviouslysoldasasecurityshouldbereevaluatedattheAmeoflateroffersorsales:§  WhetherornottheeffortsofanAP,includinganysuccessorAP,conAnuetobe

importanttothevalueofaninvestmentinthedigitalasset.

§  WhetherthenetworkonwhichthedigitalassetistofuncAonoperatesinsuchamannerthatpurchaserswouldnolongerreasonablyexpectanAPtocarryoutessenAalmanagerialorentrepreneurialefforts.

§  WhethertheeffortsofanAParenolongeraffecAngtheenterprise'ssuccess.


Characteris5cs-ReasonableExpecta5onofProfitsReasonableexpectaAonofprofitscanbeshownbythefollowing:§  Thedigitalassetgivestheholderrightstoshareintheenterprise'sincomeor

profitsortorealizegainfromcapitalappreciaAonofthedigitalasset;appreciaAoninvaluecancomefrom:•  FuncAonality/successofthenetwork

•  Secondarytradingmarketorplacormthatenablesdigitalassetholderstoreselltheirdigitalassetsandrealizegains

•  DigitalassetholderrightstodividendsordistribuAons

§  ThedigitalassetisofferedbroadlytopotenAalpurchasersascomparedtobeingtargetedtoexpectedusersofthegoodsorservicesorthosewhohaveaneedforthefuncAonalityofthenetwork.•  QuanAAesindicateinvestmentintentinsteadofdesiretousethenetwork(toomuchor

tooliKleforreasonablyexpecteduseofnetworkfuncAonality).


Characteris5cs-ReasonableExpecta5onofProfits§  LackofcorrelaAonbetween:

•  Thepurchase/offeringpriceofthedigitalassetandthemarketpriceoftheparAculargoodsorservicesthatcanbeacquiredinexchangeforthedigitalasset;

•  QuanAAesthedigitalassettypicallytradesin(ortheamountsthatpurchaserstypicallypurchase)andtheamountoftheunderlyinggoodsorservicesatypicalconsumerwouldpurchaseforuseorconsumpAon;

•  Amountoffundsraisedandwhat’sneededtobuildnetworkfuncAonality(toomuchraised).

§  Thedigitalassetismarketed,directlyorindirectly,usinganyofthefollowing:•  TheexperAseofanAPoritsabilitytobuildorgrowthevalueofthenetworkordigitalasset;

•  IndicaAonsthatpurchasesareinvestments;

•  IntenAontouseproceedsfromthesaleofthedigitalassetistodevelopthenetworkordigitalasset;

•  Future(butnotpresent)funcAonalityofthenetworkordigitalasset(tobedeliveredbyAP);absenceofcurrentlyavailablegoodsandservicesonanexisAngnetwork;

•  Thereadytransferabilityofthedigitalasset;tradingmarketofpromisethereofbyAP;

•  ThepotenAalprofitabilityoftheoperaAonsofthenetwork,orthepotenAalappreciaAoninthevalueofthedigitalasset.


Re-Evalua5onConsidera5ons–Expecta5onofProfits§  PurchasersofthedigitalassetnolongerreasonablyexpectthatconAnueddevelopment

effortsofanAPwillbeakeyfactorfordeterminingthevalueofthedigitalasset.

§  ThevalueofthedigitalassethasshownadirectandstablecorrelaAontothevalueofthegoodorserviceforwhichitmaybeexchangedorredeemed.

§  Thetradingvolumeforthedigitalassetcorrespondstothelevelofdemandforthegoodorserviceforwhichitmaybeexchangedorredeemed.

§  WhetherholdersarethenabletousethedigitalassetforitsintendedfuncAonality,suchastoacquiregoodsandservicesonorthroughthenetworkorplacorm.

§  WhetheranyeconomicbenefitthatmaybederivedfromappreciaAoninthevalueofthedigitalassetisincidentaltoobtainingtherighttouseitforitsintendedfuncAonality.

§  NoAPhasaccesstomaterial,non-publicinformaAonorcouldotherwisebedeemedtoholdmaterialinsideinformaAonaboutthedigitalasset.


OtherRelevantConsidera5ons–ConsumerUseCharacteris5csDigitalassetswiththefollowingtypesofuseorconsumpAoncharacterisAcsarelesslikelytobeinvestmentcontracts.§  FullydevelopedandoperaAonaldistributedledgernetworkanddigitalasset.

§  ImmediateabilitytousethedigitalassetforitsintendedfuncAonalityonthenetwork(parAcularlywheretherearebuilt-inincenAvestoencouragesuchuse).

§  Digitalassetstructuredandimplementedtomeettheneedsofitsusers,ratherthantofeedspeculaAonastoitsvalueordevelopmentofitsnetwork:

•  Forexample,thedigitalassetcanonlybeusedonthenetworkandgenerallycanbeheldortransferredonlyinamountsthatcorrespondtoapurchaser'sexpecteduse.

§  LimitedprospectsofappreciaAoninthevalueofthedigitalasset:

•  Forexample,thedesignofthedigitalassetprovidesthatitsvaluewillremainconstantorevendegradeoverAme(noreasonableinvestmentexpectaAon).

§  Forvirtualcurrency,itcanimmediatelybeusedtomakepaymentsinawidevarietyofcontexts,oractsasasubsAtuteforreal(orfiat)currency:

•  Canbeusedtopayforgoodsorserviceswithoutfirsthavingtoconvertittoanotherdigitalassetorrealcurrency.

•  Operatesasastoreofvaluethatcanbesaved,retrieved,andexchangedforsomethingofvalueatalaterAme.

§  FordigitalassetrepresenAngrightstoagoodorservice,canberedeemedtoacquirethegoodorservicewithinadevelopednetworkorplacormonacurrentbasis.Relevantfactorsmayinclude:

•  CorrelaAonbetweenthepurchasepriceofthedigitalassetandamarketpriceoftheparAculargoodorserviceforwhichitmayberedeemedorexchanged.

•  AvailabilityinincrementsthatcorrelatewithaconsumpAveintentversusaninvestmentorspeculaAvepurpose.

•  Exclusiveuseofdigitalassettoacquirethegoodorservice(showsintenttoconsume).


OtherRelevantConsidera5ons–ConsumerUseCharacteris5cs(cont.)§  PossibleeconomicbenefitfromappreciaAoninthevalueofthedigitalassetisincidentalto

obtainingtherighttouseitforitsintendedfuncAonality.

§  MarkeAngemphasizesthefuncAonalityofthedigitalasset,andnotthepotenAalfortheincreaseinmarketvalueofthedigitalasset.

§  PotenAalpurchaserscanuse(orhaveused)thedigitalassetforitsintendedfuncAonality.

§  RestricAonsonthetransferabilityofthedigitalassetareconsistentwiththeasset'suseandnotfacilitaAngaspeculaAvemarket.

§  IftheAPfacilitatesthecreaAonofasecondarymarket,transfersofthedigitalassetmayonlybemadebyandamongusersoftheplacorm.

§  Exampleofanonlineretailerwithafully-developedoperaAngbusiness:•  Theretailercreatesadigitalassettobeusedbyconsumerstopurchaseproductsonlyontheretailer'snetwork,offers

thedigitalassetforsaleinexchangeforrealcurrency,andthedigitalassetisredeemableforproductscommensuratelypricedinthatrealcurrency.

•  TheretailerconAnuestomarketitsproductstoitsexisAngcustomerbase,adverAsesitsdigitalassetpaymentmethodaspartofthoseefforts,andmay“reward”customerswithdigitalassetsbasedonproductpurchases.

•  Uponreceiptofthedigitalasset,consumersimmediatelyareabletopurchaseproductsonthenetworkusingthedigitalasset.

•  Thedigitalassetsarenottransferable;rather,consumerscanonlyusethemtopurchaseproductsfromtheretailerorsellthembacktotheretaileratadiscounttotheoriginalpurchaseprice.Underthesefacts,thedigitalassetwouldnotbeaninvestmentcontract.


OtherRelevantConsidera5ons–ConsumerUseCharacteris5cs(cont.)

FuncAonalitydoesnotguarantee“non-securitystatus,”wherefuncAonalityissAllbeingdevelopedorimproved.Relevantfactorsare:

§  Offeringthedigitalasset

•  atadiscounttothevalueofthegoodsorservices;or

•  inquanAAesthatexceedreasonableuse;and/or

§  LimitedornorestricAonsonresaleofdigitalassets,parAcularlywhereanAPisconAnuinginitseffortstoincreasethevalueofthedigitalassetsorhasfacilitatedasecondarymarket.


FrameworkConclusion§  Thesearesome(notall)ofthefactorsindicaAngthat:

•  Thedigitalassetisasecurity

•  Thedigitalassetisnotorisnolongerasecurity

§  NosinglefactorisdeterminaAve

§ WeencouragemarketparAcipantstoseektheadviceofsecuriAescounselandengagewiththestaffthroughwww.sec.gov/finhub.


TurnkeyNoAc5onLe`er§  Firstdigitalassetno-acAonleKer-relieffrom1933Actand1934ActregistraAon

forTokens§  BasedonthefactspresentedandopinionofcounselthattheTokensarenot

securiAes,TKJoffersandsellstheTokenswithoutregistraAonundertheSecuriAesActandtheExchangeAct.

§  Factshighlightedinstaffresponse:•  TKJwillnotuseanyfundsfromTokensalestodeveloptheTKJPlacorm,Network,orApp,andeachof

thesewillbefullydevelopedandoperaAonalattheAmeanyTokensaresold;

•  TheTokenswillbeimmediatelyusablefortheirintendedfuncAonality(purchasingaircharterservices)attheAmetheyaresold;

•  TKJwillrestricttransfersofTokenstoTKJWalletsonly,andnottowalletsexternaltothePlacorm;

•  TKJwillsellTokensatapriceofoneUSDperTokenthroughoutthelifeoftheprogram,andeachTokenwillrepresentaTKJobligaAontosupplyaircharterservicesatavalueofoneUSDperToken;

•  IfTKJofferstorepurchaseTokens,itwillonlydosoatadiscounttothefacevalueoftheTokens(oneUSDperToken)thattheholderseekstoreselltoTKJ,unlessacourtwithintheUnitedStatesordersTKJtoliquidatetheTokens;and

•  TheTokenismarketedinamannerthatemphasizesthefuncAonalityoftheToken,andnotthepotenAalfortheincreaseinthemarketvalueoftheToken.


InvestmentCompanyAct&AdvisersActCryptocurrency

Considera5ons

23©2019StradleyRononStevens&Young,LLP

Overview

•  RegistraAonrequirementsoftheInvestmentCompanyActof1940(“ICA”or“1940Act”)forfundsholdingdigitalassets

•  1940Actrequirementswhenregisteredfunds(“RICs”)investindigitalassets*

•  RegistraAonrequirementsoftheInvestmentAdvisersActof1940(“IAA”or“AdvisersAct”)whenadvisingondigitalassets

•  AdvisersActrequirementswhenregisteredadvisers(“RIAs”)adviseondigitalassets**Notdependentonthedigitalassetsbeing“securiAes.”


TheInvestmentCompanyActof1940

§  ComprehensiveregulaAonofregisteredfunds•  Mutualfunds,exchange-tradedfunds(“ETFs”),closed-endfunds(listedandunlisted)

§  RequirementsincludeSECregistraAonandreporAng,SECexamsandenforcement,investmentrestricAons,adviserrequirementsandshareholdersuits,governance,shareholderapprovals,affiliatedtransacAons,custody,capitalstructure,valuaAon,compliance

§  Canbeapplicableif:•  AnissuerofdigitalassetsthataresecuriAesisaninvestmentcompany;or

•  AfundinvestsindigitalassetsthataresecuriAes25©2019StradleyRononStevens&Young,LLP

OrthodoxInvestmentCompanies

§ Anissuerisaninvestmentcompanyif:•  EngagedprimarilyinthebusinessofinvesAng,reinvesAng,ortradinginsecuriAes;

•  Holdsitselfoutasbeingsoprimarilyengaged;or•  Proposestoengageprimarilyinthatbusiness

§ “Engagedprimarily”test—TonopahMiningfactors- Company’shistoricaldevelopment- PublicrepresentaAonsofpolicy- AcAviAesofofficersanddirectors- Natureofpresentassets-  Sourcesofpresentincome


InadvertentInvestmentCompanies

§ Anissuerisalsoaninvestmentcompanyif:•  EngagedorproposestoengageinthebusinessofinvesAng,reinvestment,owning,holding,ortradinginsecuriAes;and

•  OwnsorproposestoacquireinvestmentsecuriAes*withavalueexceeding40%ofthevalueofitstotalassets(excludinggovernmentsecuriAesandcashitems)onanunconsolidatedbasis

*“InvestmentsecuriAes”excludegovernmentsecuriAesandsecuriAesofmajority-ownedsubsidiariesthatarenotfunds


Excep5onstoInvestmentCompanyStatus§  PrimarilyengagedinabusinessorbusinessesotherthaninvesAng,reinvesAng,owning,holding,ortradinginsecuriAes(self-execuAng)

§  SECordertothateffectuponapplicaAon(goodfaithfilingprovidestemporaryexempAon)

§  Transientinvestmentcompanies(one-yearAmelimit)§  Rule3a-1:45%assetandincometestforinadvertentinvestmentcompaniesonly•  45%limitonassets(excludinggovernmentsecuriAesandcashitems)consisAngof,

and45%limitonnetincomeayertaxes(forlastfourfiscalquarters)derivedfrom,securiAesotherthan-  GovernmentsecuriAes-  SecuriAesofmajority-ownedsubsidiariesthatarenotfunds

-  SecuriAesofprimarilycontrolledcompaniesthatarenotinvestmentcompanies


Excep5onstoInvestmentCompanyStatus:PrivateFunds

§  §3(c)(1):AnissuerwhosesecuriAesarebeneficiallyownedbynotmorethan100persons•  250personsforqualifyingventurecapitalfund($10millionlimit)•  Look-throughforfundsholding10%ofvoAngsecuriAes

§  §3(c)(7):AnissuerwhosesecuriAesareownedexclusivelybyqualifiedpurchasers*(atAmeofacquisiAon)

*Generally,anaturalpersonwithatleast$5millionininvestments,orotherpersonthatownsandinvestsatleast$25millionininvestments

§  Ineithercase,mustnotbemakingorproposingtomakeapublicoffering


TheDAOReport(July2017)

§  SECdidnotanalyzewhetherTheDAOwasaninvestmentcompany,partlybecauseitnevercommencedbusiness•  “ThosewhowouldusevirtualorganizaAonsshouldconsidertheirobligaAonsundertheInvestmentCompanyAct.”

§ WouldTheDAOhavebeenaninvestmentcompany?•  IssuerofsecuriAes•  EngagedprimarilyinthebusinessofinvesAng

•  ?Notdeterminedwhetherinvestmentswouldhavebeenin“securiAes”


CryptoAssetManagement§  OnlyenforcementacAonfinding1940ActviolaAonbyadigitalassetsfund.

ReleaseNos.33-10544,IA-5004,IC-33222(Sept.11,2018)§  FundstructuredasLPandformedforthepurposeofinvesAngindigitalassets;

representedthatitwasSEC-registered§  Orderfoundittobeaninadvertentinvestmentcompany–digitalassetsecuriAes

exceeding40%ofvalueofitsassets•  Hadonly44investors,but3(c)(1)apparentlyunavailablebecauseitwasfoundtohavemade

publicoffering

§  FoundtohaveviolatedSecuriAesAct§5(a),(c)(failuretoregisterpublicoffering)and§17(a)(2)(materialmisstatementsinoffering),ICA§7(a)(failuretoregisterasRIC),andIAA§206(4)(failuretoregisterasRIA)andRule206(4)-8(materialmisstatementsw/r/tafund)•  Sponsorfined$200,000

•  Sponsorhaltedoffering,maderescissionoffering,disclosedmisstatements,andbeganRegulaAonDRule506(c)privateplacement

§  Offeringwasfor$3.6million;fund’svaluewas$37millionat12/31/201731©2019StradleyRononStevens&Young,LLP

SECStaffLe`eronCryptocurrency-relatedHoldings

§  LeKerfromDaliaBlass,DirectorofSECDivisionofInvestmentManagement(1/18/2018),seekingcommentonfundsholdingsubstanAalamountsofcryptocurrencyandrelatedproducts•  IncludescryptocurrenciesthatarenotsecuriAesandthatareheldindirectly

•  Responsesavailableonline,hKps://www.sec.gov/investment/fund-innovaAon-cryptocurrency-related-holdings

§ UnAlthesequesAonscanbeaddressedsaAsfactorily,staffwillviewunfavorablyregistraAonoffundsinvesAngsubstanAallyincryptocurrencyandrelatedproducts


IssueswithCryptocurrencyHoldings§  ValuaAon•  MutualfundsandETFsmustvaluetheirassetsoneachbusinessday

§  Liquidity•  MutualfundsandETFsmustmaintainliquiditytosupportredeemabilityand(exceptforIn-KindETFs)mustclassifytheliquidityoftheirinvestments

§  Arbitragemechanism(forETFs)•  HowcanETFsensuretheirmarketpricesdonotdeviatemateriallyfromtheirnetassetvalue?

§  PotenAalmanipulaAonandotherrisks•  ConcernsthatcryptocurrencymarketshavelessinvestorprotecAon,greateropportuniAesforfraudandmanipulaAon


MoreIssueswithCryptocurrencyHoldings§  Custody•  HowwouldafundholdingcryptocurrencydirectlysaAsfytheICAcustody

requirements?-  “SecuriAesandsimilarinvestments”generallymustbeincustodyofabankorbroker-dealer

•  Howwoulditvalidateexistence,exclusiveownership,andsoywarefuncAonalityofprivatekeysandotherownershiprecords?

•  TowhatextentwouldcybersecuritythreatsorpotenAalforhacksimpactsafekeeping?

•  Staffnotawareoffundcustodialservicesforcryptocurrencies-  SincetheBlassleKer,severalcryptocurrencycustodiansarereported(e.g.,Gemini,Bitgo,

Coinbase,Fidelity)

•  Ifafundinvestsincryptocurrency-relatedderivaAvesthatarenotcash-seKled,couldithandlephysicalseKlement?

•  SEChasindicateditplansacustodyrulemaking,withproposallikelyinearly2020


StructuralApproaches§  Registeredfunds(mostlyETFs)•  AllregistraAonstatementswithdrawninresponsetoBlassleKer

§  Privatefunds•  Compliantapproach,subjectto3(c)(1)/3(c)(7)limitsandIAAcompliance

§  Non-1940Actcryptocurrencyfunds•  AccesscryptocurrenciesbyinvesAnginbitcoinorbitcoinfutures•  Forexchange-tradedproducts(“ETPs),SECsofarhasrefusedtoapprovesecuriAesexchangelisAngs–concernsthatbitcoinmarketsareunregulated.WinklevossBitcoinTrust,ReleaseNo.34-83723(July26,2018)

•  Thereisatleastoneover-the-countercryptocurrencyfundthatisregisteredonlyundertheSecuriAesActof1933,BTCSInc.-  InvestsindigitalassetsthatarenotsecuriAes(bitcoin,ether)


InvestmentAdvisersActof1940

§  PrimaryfederalstatuteregulaAngpersonswhoprovideinvestmentadvicewithrespecttosecuriAes

§  RequirementsincludeSECregistraAon,SECexamandenforcementauthority,supervision,clientdisclosures,advisoryagreementprovisions,adverAsingregulaAon,complianceprogram

§  TheDAOReport:BecauseTheDAOnevercommencedoperaAon,didnotanalyzeadviserstatus•  “ThosewhowouldusevirtualorganizaAonsshouldconsidertheirobligaAonsundertheAdvisersAct.”

§  CryptoAssetManagementorderincludedIAAviolaAons


InvestmentAdviserDefini5on

§  Ingeneral,aninvestmentadviserisapersonwho:•  Providesadvice,orissuesreportsoranalyses,regardingsecuriAes;

•  Isinthebusinessofprovidingsuchservices;and•  ProvidessuchservicesforcompensaAon

§ “Security”hasthesamemeaningundertheAdvisersActasunderthe1940Act

§ AdviceaboutinterestsinenAAesthatownnon-securiAeswouldgenerallybeadviceaboutsecuriAes


FederalorStateRegistra5on

§ FederalregistraAongenerallyrequiredif:•  AdvisertoaRIC;or•  Atleast$100millioninassetsundermanagement(opAonalfor$100-$110millionlevel)- AnaccountisasecuriAesporcolio(andcountsasassetsundermanagement)ifatleast50%oftotalvalueconsistsofsecuriAes(includingcashandcashequivalents)

§ StateregistraAonrequirementsvarybystate•  NoregistraAonatstatelevelifSEC-registered•  RegistraAonmayberequiredinmulAplestates


InvestmentAdviserRepresenta5ves

§ MoststatesimposearegistraAonandtesAngrequirementoninvestmentadviserrepresentaAves(“IARs”),if:•  TheIARprovidesinvestmentadviceonbehalfoftheadviser;•  TheIARhasmorethanfiveclientswhoarenaturalpersons,whoaremorethan10%oftheIAR’sclients(exceptforqualifiedclients*);and

•  TheIARhasaplaceofbusinesswithinthestate*Aqualifiedclientgenerallyhasatleast$1millionundertheadviser’smanagementoranetworthofmorethan$2.1million(includingprimaryresidence)


SelectedAdvisersActRequirements

§ FiduciaryobligaAonsandconflictsofinterestdisclosures–notlimitedtosecuriAes

§ Codeofethics:AccesspersonsmustreportpersonalsecuriAestransacAonsandholdingstotheRIA•  CompliancechallengesfordigitalassetsecuriAes–currentlyanissueforallRIAs


IAACustodyRule§  Rule206(4)-2requires“funds”and“securiAes”tobemaintainedbyaqualifiedcustodian*

*Generally,abank,broker-dealer,orfuturescommissionmerchant•  ThisincludesaprivatefundthattheRIAcontrols(butnotaRIC)•  FundsandsecuriAesmustbeverifiedbyactualexaminaAonbyanindependentpublicaccountant

§  StaffleKer(3/12/2019)raisesquesAonsondigitalassetsandcustodyrule•  WhensecuriAesdonottradeonadelivery-versus-paymentbasis,doesabilitytotradegiverisetocustody?UnderconsideraAon

•  InvitaAonforcommentsoncustodyofdigitalassets;nocommentsyetposted


AreDigitalAssetsCommodi5es?


AreDigitalAssetsCommodi5es?

§ Yes,CFTCini5allyassertedthisposiAoninadministra5veproceedings

•  DidnotprovideitsraAonale

§  Incivilac5ons,defendantschallengedthisasserAon•  CFTCrequiredtosupplysomera5onale

§ CourtssidedwithCFTC,butsplitonra5onale


WhatisaCommodity?

§ Twocategoriesofcommodi5es•  Anenumeratedlistofagriculturalcommodi5es;and

•  Allothergoodsandar5cles,…andallservices,rights,interestsinwhichcontractsforfuturedeliveryarepresentlyorinthefuturedealtin


Legisla5veHistoryBehindDefini5on

§  SecondcategoryofdefiniAonaddedin1974§  IntendedtograntnewlycreatedCFTCauthorityovertransac5onsrela5ngtofuturesmarkets

§  ExpandedCFTC’sjurisdic5onwithoutcongressionalac5on(notaddingcommodiAesinpiecemeal)

•  ExpandeddefiniAoninvitesques5onsastoCFTC’sjurisdic5on•  Especiallyfornovelproducts


AreDigitalAssetsaCommodity?§  Listofitems,“andallothergoodsandar5cles,…andallservices,rights,andinterests…inwhichcontractsforfuturedeliveryarepresentlyorinthefuturedealtin.”

•  Aretheygoodsandar5cles?•  Aretheyservices,rightsandinterests?•  Dotheyalsoneedafuturescontract?•  Isitenoughtohaveafuturescontractonanotheritemthatbelongstothesamecategoryofcommodity?

-  MyBigCoin–similartoValencia–naturalgasissimilartowestcoastnaturalgas


AreDigitalAssetsDeriva5ves?


WhatisaDeriva5ve?

§ Deriva5veiscontractwherevaluederivesfromvalueofunderlyinginterest

•  E.g.commodity,interestrate,occurrenceofanevent,orsecurity


PiecemealRegula5onofDeriva5ves

§  CEAregulatesmanytypesofderiva5ves§  CEAalsoregulatescertainretailtransac5onsthatarenotnecessarilyderiva5ves

§  CEAimposesrequirementstodifferentclassifica5onsoftransac5ons

§  CEAfurtherdis5nguishesbasedonunderlyinginterest


WhataretheDifferentClassifica5onsofDeriva5ves?

1)  FuturesContracts— Contractsforsaleofcommodi5esforfuturedelivery

— Excludes:Commercialmerchandisingcontractsfordeferreddeliveryofacommodity

2)  Op5onsonFutures•  Exercisablerighttobuyorsellafuturescontract

3)  Op5ononCommodi5es—Exercisablerighttobuyorsellacommodity


Classifica5onsofDeriva5ves(cont.)

4)  Swap—Contractsdependonvalueofsomethingelse—Certainexclusions

5)  RetailOTCforeigncurrencyin“Financed”6)  RetailCommodityTransac5ons-  transacAonsincommodi5es-  thatarenotforeigncurrenciesorsecuri5es-  withretailcustomers-  enteredintoorofferedonamargined,leveragedor

financed(hereinayer“Financed”)basis


FuturesandOp5onsRegula5on

§ Mustbetradedonorsubjecttorulesoffuturesexchange(i.e.,aDCM)

§ Mustbecentrallyclearedbyaderiva5vesclearinghouse(i.e.,aDCO)

§ FCM,IB,CTAorCPOregistra5on


CommodityOp5onsRegula5on

§ CFTChasbroadauthoritytoadoptrulesoncommodityop5ons

§  Noauthorityoverop5onsonsecurity(orgroupofindexsecuri5es)

§ Generallyregulatedasswaps§ Excep5on:Op5onsonexemptcommodi5es•  TradeOp5onExemp5on


SwapsRegula5on

§ Noexchange-tradingrequirement

§ Onlysomeswapsrequiremandatoryclearing§ Alltradeinforeportedtoswapdatarepository(SDR)§ FCM,IB,CTA,CPO,SDorMSPregistra5on


WhatareRetailCommodityTransac5ons?

§ Transac5onsincommodi5es•  Otherthan:foreigncurrenciesorsecuri5es

§ Enteredbyretailcustomers

§ OnFinancedbasis§ CFTChasimplieddigitalassetslikelyfallunderthiscategory


RetailCommodityTransac5onsRegula5on

§ Regulatedasor“asif”theyarefutures§ Mustbeexchangetradedandcleared§ FCM,IB,CTAorCPOregistra5onrequired§ Bilinex–Operatedunregisteredonlineplalormindigitalassets–failedtoregisterasFCM


2Exemp5onstoRetailCommodityTransac5ons

§ ActualDeliveryExempAon§ EnforceableDeliveryObligaAonExempAon-  Importanceofeitherexemp5on:-  AllowsOTCtradingand-  Noregistra5on


ActualDeliveryExemp5on

§ Contractforsaleofcommodity§ Thatresultsin“actualdelivery”within28days§ Requirements:•  Buyermusthaveabilitytotakepossessionandcontrolofen5reamountanduseitfreelywith28days;AND

•  Sellercannotretainanyinterestorcontrolayer28days


Whyis“ActualDelivery”DebatedinDigitalAssets?

§ Bi>inexCase•  Bitcoinpurchasedwithborrowedfundsbyretailinvestors•  Deliveredtoaprivatewallet•  Coinswereheldforbenefitofbuyer•  Coinsalsoheldascollateralforloan•  Buyerdidnothaverighttoaccessorusebitcoinun5lsa5sfac5onofloan

§ Courtheldnoactualdelivery


HowMightMonexShakeThingsUp?§  Insimilarcaseinvolvingpreciousmetals(whichCFTCrelatestodigitalassets)

§  CFTCargued:ActualdeliveryrequiresafulltransferofpossessionandcontrolovercommodiAes

§ Monexcourtdisagreed;foundthat:•  Thisisacommonprac5ce•  CFTC’sviewwouldeliminatetheActualDeliveryExemp5on•  Customerscouldgetphysicalpossessionifmadefullpayment•  CFTCappealedto9thCircuit


WhatDidMonexSayAboutFraud?

§ CFTCcanonlyassertjurisdic5onwhenitshowsbothfraudANDmanipula5on

§ ConflictswithMcDonnell,andothercourts,whereeitherissufficient

§ Monexcurrentlyonappeal


WhatExclusionsExistfromCFTCJurisdic5on?


ExclusionsfromCFTCRegula5on

1.   SpotContracts

2.   CommercialForwardContracts


SpotTransac5ons

§ CFTCnotauthorizedtoadoptrulesregulaAngtradinginspotmarkets

§ Authoritytomonitorandrequirecertainrepor5ng§ Authorityoverfraudandmanipula5onofanycommodity


WhatisaSpotContract?

§ Spotcontract:•  commercialcontract•  forsaleofcommodity•  fordeliverywithin2days(orothershortindustryAmeframe)

•  commodityistypicallydelivered


SpotContractRegula5on

§ Generallyoutsideregula5onofCEA

§ Mostcryptofirms§ CFTCsAllhasjurisdic5onover:•  Exceptforfraudandmanipula5on•  ExceptforpotenAalapplicaAonofretailcommodityprovisions(i.e.,iffinanced)


What“Type”ofCommodityisaDigitalAsset?


WhatClassifica5onsofCommodi5esareThere?

§ ForeignCurrency•  CFTChasexplicitlyclaimedthatdigitalassetsarenotforex

§ Agriculturalv.Excludedv.Exempt•  CFTChasimplicitlyclaimedthatdigitalassetsareexemptcommodi5es

§ Securi5esCommodityv.Non-Securi5esCommodity•  CFTCseemstoassumedigitalassetsarenon-securi5es


WhatisanExcludedCommodity?

§ “Financial”commodiAes

§ Relatetoratesorconsequencesoffinancialnature

§ Examples:interestrates,exchangerates,securityindexes,etc.

§ Usuallythoughttobeoutsidecontrolofpar5es


WhatisanExemptCommodity?

§ Catch-allcategory

§ Notagriculturalorexcludedcommodity

§ Examples:metals,energycontracts

§ DigitalassetsgenerallythoughtbyCFTCtobeexemptcommodi5es


BenefitsifExemptCommodity

§ Forwardcontractexclusionfrom“swap”definiAonislimitedtoexemptcommodiAes

§ Tradeop5onexemp5onfrom“swap”definiAonislimitedtoexemptandagriculturalcommodiAes

§ Exclusionfrom“futures”definiAongenerallynotavailableforexcludedcommodi5es


Alloca5onofJurisdic5onBetweenCFTCandSEC


Securityv.Non-SecurityCommodi5es

§  SecurityCommodity•  commoditybasedonasecurity

§ Non-SecurityCommodity•  commoditynotbasedonsecurity

§  CFTCseemstoassumethatdigitalassetsarenon-securitycommodi5es

§  SEClikelytodisagree


ImportanceofDis5nc5on§  CFTCjurisdic5onoverfraudandmanipula5oncommodi5es§  CFTConlyhasfullregulatoryauthorityoverderiva5vesonnon-securitycommodi5es

§  Alloca5onofSECandCFTCjurisdic5onwhen:•  Securitycommodity•  Non-securitycommodityembeddedinasecurity

•  Deriva5vehasbothsecuri5esandnon-securitycommodi5esasunderlyingreferencecomponents


Jurisdic5onalChallenges&Gaps

§ Novelcharacteris5cscreateunprecedentedchallenges

§ Temporaltransforma5ons

§ GapsinregulaAonofspotmarkets§ RepeatedBitcoinETFrejec5onsduetoconcernsofunregulatedspotmarket


UnansweredQues5ons§  Whatkindofcommodityisit?•  Security•  Foreigncurrency•  Agricultural•  Exempt(physical/non-financialbutnotagricultural)•  Excluded(financial)

§  AddressingpotenAalforregulatoryoverlap•  DualregulaAon•  InconsistentregulaAon•  FricAonbetweenregulators•  Marketuncertainty•  AllocaAonofjurisdicAon(CongressionalacAon)


NFA–CryptoDisclosures

§ EffecAveOctober31,2018:•  AllNFAmembersthatengageindigitalassetsrequiredtoprovidecertaincrypto-relateddisclosures

•  TailoredandprescribeddisclosuresdependingonnatureofcryptotransacAons


SECEnforcement


June2018

§ TheDAOReportofInvesAgaAon•  HoweytestappliestodeterminewhethertokensaresecuriAes

•  SecuriAesmustberegisteredabsentavalidexempAonfromregistraAon

§ TheCyberUnit§ CriminalandCivilFraudSchemes§ UnregisteredSecuriAesOfferings


HowweHowey

§ May9,2019speechbyCommissionerHesterM.Peirce•  “IalsoexpressedmyconcernthattheSECwouldleadwithitsenforcementpowers,thusallowinganxietyabouttherisksofnewtechnologytoovershadowtheopportuniAesitpresents.IworriedthathastyregulaAonwouldsmothertheindustryinitsinfancy.Myconcernsdidnotbecomereality.TheenforcementacAonswehavetakentodateinthecryptospacehave-forthemostpart-exhibitedappropriaterestraint.”

§ Appropriaterestraint?


TokenLot(Sept.2018)§  CyberUnitobtainedaseKlementwithaself-described“ICOSuperstore”andits

ownersforacAngasanunregisteredbroker-dealer§  Firstcasecharginganunregisteredbroker-dealerforsellingdigitaltokens§  TokenLotpromoteditswebsiteasawaytopurchasedigitaltokensduringICOs

andtoengageinsecondarytrading§  TokenLotprofitedfromfacilitaAngtradesandreceivedapercentageoffunds

raisedduringtheofferings§  ConductviolatedSecAon15(a)oftheExchangeActandSecAons5(a)and(c)ofthe

SecuriAesAct§  Agreedtoretainaqualifiedindependentintermediarytotakepossessionofthe

digitaltokensanddestroythem§  Jointdisgorgementandprejudgmentinterestof$478,929anda$45,000civil

penaltyandthree-yearindustrybarforeachofthetwoowners


TokenLot(Sept.2018)(cont.)§  EnforcementDivisionCo-DirectorAvakian:“U.S.securiAeslawsprotectinvestors

bysubjecAngbroker-dealersandothergatekeeperstoSECoversight,includingthoseofferingICOsandsecondarytradingindigitaltokens[.]WeconAnuetoencouragethosedevelopingdigitalassettradingbusinessestocontacttheSECstaffatFinTech@sec.govforassistanceinanalyzingregistraAonandothersecuriAeslawrequirements.”

§  EnforcementDivisionCo-DirectorPeikin:“ThepenalAesinthiscasereflectthepromptcooperaAonandremedialacAonsbyTokenLot,Kugel,andLewiK[.]TokenLot,Kugel,andLewiKprovidedvaluableinformaAontoCommissionstaff,stoppedtheconduct,andrefundedmoneytoinvestors.”


CryptoAssetManagement(Sept.2018)§  AssetManagementUnitseKledfirstenforcementacAonforaninvestmentcompany

violaAonbyahedgefundanditsfounderbasedonitsinvestmentsindigitalassets§  CAMofferedafundthatoperatedasanunregisteredinvestmentcompanywhilefalsely

markeAngitasbeingregulatedbytheSECandthatithadfiledaregistraAonstatement§  Fundinvestedmorethan40percentofthefund’sassetsinthebusinessofinvesAng,

holdingandtradingcertaindigitalassetsthatwereinvestmentsecuriAesandsometthedefiniAonofaninvestmentcompany

§  CAMviolatedSecAons5(a)and5(c)oftheSecuriAesActandcausedtheFund’sviolaAonofSecAon7(a)oftheInvestmentCompanyAct

§  BothCAManditsfounderviolatedSecAon17(a)(2)oftheSecuriAesActandSecAon206(4)(andRule206(4)-8thereunder)oftheAdvisersAct

§  Ayerbeingcontacted,CAMceaseditspublicofferingandofferedbuybackstoinvestors–beganofferingsecuriAesinJanuary2018pursuanttoRegDRule506(c)exempAon

§  $200,000jointcivilpenalty


EtherDelta(Nov.2018)§  AcAonbyCyberUnitandNewYorkRegionalOfficeagainstthefounderofanonlineplacormforsecondarymarkettradingofERC20tokens,atypeofblockchain-basedtokencommonlyissuedinICOs

§  PlacormoperatedasanunregisterednaAonalsecuriAesexchangebyprovidingforthetradingoftokensthataresecuriAesunderthefederalsecuriAeslaws

§  PlacormusedasmartcontractrunontheEthereumblockchaintofacilitatethetrades

§  AlmostallofthetradingacAvityontheplacormoccurredayertheissuanceoftheDAOreport

§  ViolatedSecAon5oftheExchangeAct§  Founderagreedtopay$313,000indisgorgementandprejudgmentinterestanda$75,000civilpenalty(duetohiscooperaAonwiththeinvesAgaAonandagreementtotesAfyinanyrelatedenforcementacAon)


EtherDelta(Nov.2018)(cont.)§  EnforcementDivisionCo-DirectorAvakian:“EtherDeltahadboththeuserinterfaceandunderlyingfuncAonalityofanonlinenaAonalsecuriAesexchangeandwasrequiredtoregisterwiththeSECorqualifyforanexempAon.”

§  EnforcementDivisionCo-DirectorPeikin:“WearewitnessingaAmeofsignificantinnovaAoninthesecuriAesmarketswiththeuseandapplicaAonofdistributedledgertechnology[.]Buttoprotectinvestors,thisinnovaAonnecessitatestheSEC’sthoughculoversightofdigitalmarketsandenforcementofexisAnglaws.”


Blockvest(Nov.2018)§  AcAonbyMarketAbuseandCyberUnittoaKempttohaltaplannedICOthatsold

tokensthroughawebsiteandrepresentedthattheofferinghadbeenapprovedbytheSEC

§  SECiniAallysoughtandreceivedatemporaryrestrainingorderfreezingdefendants’assetsandgranAngotheremergencyrelief

§  Ayerreceivingthetemporaryrestrainingorder,theSECsoughtapreliminaryinjuncAon

§  DefendantresistedthepreliminaryinjuncAononthegroundsthatthetokenswereonlyusedtotestanonlineplacorm

§  InNovember2018,thedistrictcourtdeniedtheSEC’smoAonforapreliminaryinjuncAon,noAngthatissuesoffactexistedastowhetherthetokensweresecuriAesunderHoweyandwhetherthetestinvestorshadanexpectaAonofprofitsorweresimplyassisAngwithtesAngtheplacorm

§  SECwonitsmoAonrequesAngreconsideraAoninFebruary2019andthedistrictcourtgrantedtherequestedpreliminaryinjuncAon


MayweatherandKhaled(Nov.2018)§  NewYorkRegionalOfficeandtheCyberUnitseKledchargeswithprofessionalboxerandmusicproducerforfailingtodisclosepaymentstheyreceivedforpromoAnginvestmentsinICOs

§  FirstcasestochargetouAngviolaAonsinvolvingICOs§  ViolatedSecAon17(b)oftheSecuriAesAct§  $314,775indisgorgementandprejudgmentinterestanda$300,000civilpenaltyfortheboxerand$52,725indisgorgementandprejudgmentinterestanda$100,000civilpenaltyforthemusicproducer

§  BothcelebriAesalsoagreedtonotpromoteanysecuriAes,digitalorotherwise,fortwo(producer)tothree(boxer)years


MayweatherandKhaled(Nov.2018)(cont.)§  EnforcementDivisionCo-DirectorAvakian:“Thesecaseshighlighttheimportanceoffulldisclosuretoinvestors[.]Withnodisclosureaboutthepayments,MayweatherandKhaled'sICOpromoAonsmayhaveappearedtobeunbiased,ratherthanpaidendorsements.”

§  EnforcementDivisionCo-DirectorPeikin:“InvestorsshouldbeskepAcalofinvestmentadvicepostedtosocialmediaplacorms,andshouldnotmakedecisionsbasedoncelebrityendorsements[.]Socialmediainfluencersareoyenpaidpromoters,notinvestmentprofessionals,andthesecuriAesthey’retouAng,regardlessofwhethertheyareissuedusingtradiAonalcerAficatesorontheblockchain,couldbefrauds.”


Kik(Dec.2018)§  SECissuedaWellsNoAcetoKikinNovember2018indicaAngthatitwouldrecommendtheCommissionfileanacAonforviolaAonsofSecAons5(a)and5(c)oftheSecuriAesAct

§  KiksubmiKedapubliclyavailableresponseinDecemberandmadethefollowingarguments:•  Asacurrency(resemblingBitcoinandEther),KikisexemptfromthedefiniAonofa

“security”underthefederalsecuriAeslaws•  ThetokenssoldbyKikdonotconsAtuteinvestmentcontracts-  ThereisnocommonenterprisebetweenKikand/ortheKinFoundaAonand

purchasersoftheKintokens-  Kinpurchaserswerenotledtoexpectprofitsfromtheeffortsofothers

§  OnJune4,2019,theSECsuedKikforconducAnganillegal$100millionsecuriAesofferingofdigitaltokensinviolaAonofSecAons5(a)and5(c)oftheSecuriAesActof1933


GladiusNetworkLLC(Feb.2019)§  CyberUnitseKledchargeswithacompanyforconducAnganunregisteredICO

§  Tokensintendedtoserveasadecentralized,peer-to-peernetworkthatwouldusedistributedledgertechnologytofightagainstcyberaKacksbyallowingownerstoaccesssparebandwidthandstorage

§  Companyself-reporteditsconducttotheSEC,undertooktoreturnfundstoinvestorswhopurchasedtokensintheICOandtoregisteritstokensassecuriAespursuanttotheSecuriAesExchangeActof1934

§  CommissionmadethedeterminaAonnottoimposeacivilpenaltyduetotheseremedialactsandtheextensivecooperaAonwithitsinvesAgaAon

§  ChiefCohen:“Today’scaseshowsthebenefitofself-reporAngandtakingproacAvestepstoremediateunregisteredofferings.”


NextBlockGlobalLtd.(May2019)§  AssetManagementUnitandOntarioSecuriAesCommission(OSC)seKledchargeswithacompanyanditsco-founderandformerCEOformakingmisrepresentaAonsinconnecAonwithasecuriAesofferingin2017

§  NextBlockandco-founderfalselyrepresentedtoinvestorsthatasmanyasfourprominentindividualsintheblockchainindustrywereservingasadvisorstoNextBlock

§  FollowingdisclosureofthemisrepresentaAon,NextBlockiniAatedcourtproceedingsinOntariotowindupthecompanyandreturntheofferingproceedstoinvestors

§  $25,000civilpenaltyforco-founderandacease-and-desistorderforNextBlockandco-founder

§  NextBlockagreedtopaytheOSCaCAD$700,000administraAvepenaltyandCAD$100,000toreimbursethecostoftheinvesAgaAonwhileco-founderagreedtopayaCAD$300,000administraAvepenalty


ArgyleCoinLLC(May2019)§  AcAonbyMiamiRegionalOfficeagainstacompanyanditsprincipalforrunningaPonzischeme

§  Investorsluredtoinvestincryptocurrencythroughfalseclaimthatinvestmentrisk-freebecauseitwasbackedbydiamonds

§  Instead,investorfundsmisappropriatedtopayotherinvestorsandforpersonalexpenses

§  ChargedviolaAonsofSecAons5(a),5(c),17(a)(1),and17(a)(3)oftheSecuriAesActof1933andSecAon10(b)oftheSecuriAesExchangeActof1934andRules10b-5(a)and(c)thereunder


DanielPacheco(May2019)§  AcAonbyLosAngelesRegionalOfficeagainstindividualandtwocompanieshe

controlledforconducAngafraudulent,unregisteredofferingofsecuriAes§  InvestorsreceivedinstrucAonalpackagesand“points”thatcouldbeconvertedintoa

cryptocurrencyandcouldreceivecashcommissionsandaddiAonalpointsbyrecruiAngnewinvestors

§  Cryptocurrency,infact,afraudulentpyramidscheme§  PachecoalsoconvertedinvestorfundstopurchaseahomeandaRollsRoyce§  MicheleWeinLayne,DirectoroftheSEC’sLosAngelesRegionalOffice:“Weallegethat

Pachecohidanoldfraudundertheguiseofcu�ng-edgetechnology.HeenAcedinvestorsbyofferingthemtheopportunitytospeculateincryptocurrency,wheninfacthewassimplyoperaAngapyramidscheme.”

§  ChargedviolaAonsofSecAons5(a),5(c),17(a)(1),17(a)(2)and17(a)(3)oftheSecuriAesActof1933andSecAon10(b)oftheSecuriAesExchangeActof1934andRules10b-5(a),(b),and(c)thereunder


FINRARegula5on


FINRAAlerts

§ FINRA–InvestorAlertsoncryptoandblockchain•  CryptocurrencyTradingPlacorms:DoYourHomework•  Don’tFallforCryptocurrency-RelatedStockScams•  Bitcoin:MoreThanaBitRisky•  Ge�ngaHandleonVirtualCurrencies•  Here’sHowtoAvoidCryptoStockScams•  BitcoinBasics–9ThingsYouShouldKnowAbouttheVirtualCurrency

•  Podcast:DemysAfyingCryptocurrency


TimAyre–HempCoins–FINRA§  FirstFINRAdisciplinaryac5onrelaAngto

cryptobusiness§  TimAyre–RegisteredRepresentaAve–B/DAyreInvestments–Rocky

MountainAyre

§  CreatedaSecuritywhen:•  PurchasedrightstoHempCoinfromTHCFarmaceu5cals;and•  BackedcryptowithsharesofRMTN-  ataraAoof1RMTNto10HempCoins

§  Outcome:•  Engagedinofferandsaleofunregisteredsecuri5esinviola5onof1933Act,Sec5on5•  VariousfraudulentstatementsviolatedSEA1934,Rule10b-5andFINRARules2020and2010•  EngagedinPrivateSecuriAesTransacAonsWithoutNoAcetoFirm–FINRARules3280and2010•  BarredfromIndustry


NorthAmericanSecuri5esAdministratorsAssocia5on(NASAA)


NASAA:Opera5onCryptosweep §  TheNASAAlaunchedataskforcein2018toinvesAgateICOsandcryptocurrency-

relatedinvestmentproducts.OperaAonCryptosweephasresultedinnearly50enforcementacAonsincluding:•  AdosiaLLC–engagedinanunregisteredsecuriAesofferinginviolaAonoftheNorthCarolina

SecuriAesAct.ThetechnologycompanyundertookanICOtopromoteitsblockchain-enabledplacormwithoutregisteringwiththestate.AdosiaanditsexecuAveagreedtoaconsentorderwhichpermanentlybarsbothfromfurtherviolaAngtheAct.

•  BCHoldingsandInvestmentsLLC–madefalseandmisleadingstatementsinconnecAonwiththeofferandsaleofinvestmentsincryptocurrencymining.TheinvestmentprogramwasasecurityandunregisteredinviolaAonoftheTexasSecuriAesAct.TheSecretaryofStateissuedaceaseanddesistorderwhichresultsinacriminaloffenseifviolated.

•  ForexEA&BitcoinInvestmentLLCetal.–madefraudulentrepresentaAonsguaranteeinginvestorreturnsinconnecAonwithacryptocurrencytradingprogram.TheinvestmentcontractswereunregisteredsecuriAesandnorespondentwasabroker/dealer.InvestorfundswereusedforpersonaluseTheGeorgiaSecuriAesCommissionerissuedanemergencyceaseanddesistorderbarringthecompanyfromviolaAngthestate’sUniformSecuriAesAct.


PrivateLi5ga5on


Takatav.RiotBlockchainInc.,f/k/aBiop5x,et.al

§  ClassacAonsuitallegesRiotBlockchainInc.,formerlyknownasBiopAx,Inc.,engagedinapumpanddumpschemetoinflatethecompany’sstockayeritswitchedfocusfrombiopharmaceuAcaltocryptocurrencytechnology•  CompanyexecuAvesallegedlymadefalseandmisleadingstatementsaboutthe

company’sbusiness,operaAonsandprospectsinordertoincreasethestockpriceandlureinvestors.

§  TheclassacAonissAllpending.RiotBlockchainInc.filedamoAontodismissinMarch2019arguingthatcorporatemismanagementdoesnotconsAtutefederalsecuriAesfraud.Todate,thecourthasnotruledonthismoAon.

§  TheSECalsofiledacivilacAonagainstthecompany’sCEO,alongwithitslargestinvestorandotherexecuAves,allegingfraudulentmanipulaAonofstockpricesofcompaniesotherthanRiotBlockchain.


Symphonyv.Thompson§  SymphonyFSLimited,acompanythattradesindigitalassetsandcryptocurrenciesfiledanacAonagainstescrowagentJ.BarryThompsonforbreachofcontractayeranescrowdealfellthrough.ThompsonoperatedVolanAsEscrowPlacormLLC,anescrowbusinessrelatedtocryptocurrencytransacAons.•  SymphonynegoAatedwithVolanAsforthepurchaseofbitcoin.Ayerwiring

morethan$4milliontotheVolanAsescrowaccount,Symphonyneverreceivedthebitcoinsorarefund.Thompsonallegedlypurchased500bitcoinsforSymphonybutnevertransferredthemtothecompany.Thompsonclaimedthefundswerestolenbyathird-partyintermediaryheusedforthetransacAon.

§  SymphonybroughtanarbitraAonclaimagainstVolanAsandfiledinfederalcourtagainstThompson.


UnitedAmericanInc.v.BitmainInc.etal.

§  PlainAfffiledanacAonagainstBitmain,abitcoinminer,alleginganAtrustviolaAonsandnegligentmisrepresentaAoninaddiAontootherclaims.•  BitmainInc.alongwithotherdefendantsallegedlyengagedinaschemeto

manipulatethecryptocurrencymarketforBitcoinCashtothedetrimentofinvestors.UnitedAmericanInc.alsoallegedthatthedefendantsconspiredtohijackacryptocurrencysoywareupgraderesulAnginaglobalcapitalizaAonmeltdownofmorethan$4billion.

§  PlainAffisseekingresAtuAon,disgorgementandtrebledamages.

§  InFebruary2019,threedefendantsfiledamoAontodismissdenyingtheallegedconspiracyandarguingthattheallegedmeltdownwassimplyamarketcorrecAon.ThecaseissAllpending


LongfinCorp.etal§  ShareholdersfiledaclassacAonagainstLongfin,atechnologytradingcompany,

forallegedlymakingfalseandmisleadingstatementsinviolaAonoffederalsecuriAeslaws.•  LongfinanditsexecuAvesallegedlymadefalsestatementsaboutthebusiness,

operaAonsandprospects.ThecompanyalsoallegedlyfailedtodisclosethatitwasineligibletobelistedontheRussell2000and3000indices.InvestorslostmillionsayerthecompanywasbootedfromtheRussellindex.

•  ThecaseissAllpending§  TheSECalsofiledanacAonagainstLongfinanditsexecuAvesforallegedlyselling

unregisteredsecuriAes•  Thecompany’sstockpricesskyrocketedayeritacquiredacryptocurrency

business.ItallegedlysoldrestrictedsharesofitsstocktocompanyaffiliatesinviolaAonoffederalsecuriAeslaws.

•  ApreliminaryinjuncAonwasgrantedtofreezethecompany’sassetsunAltrial.OnJune10,2019,threeexecuAvesreachedaseKlementarrangementwiththeSECagreeingtopayroughly$26million.


InReTezosSecuri5esLi5ga5on

§  ClassacAonsuitallegingTezossolditscryptocurrency,“Tezotokens,”asunregisteredsecuriAes.PlainAffsalsoallegethattheycontributedmorethan$109milliontotheSwisscompany’sICObutthetokensneverappreciatedinvalue.•  TezosarguedthatthetokenswereneverguaranteedandtheICOwassimplyafundraisingevent.

•  Thedefendants’moAontodismisswasdenied.EventhoughthecompanyisaSwissenAty,federalsecuriAeslawsAllappliedbecausethecompanymarketedmainlytoU.S.ciAzens.


Speakers


RuthS.EpsteinRuthEpsteinhasmorethan30yearsofcorporate,securiAesandfinancialservicesexperience,includingfiveyearswiththeSecuriAesandExchangeCommissionintheDivisionofEnforcementandtheOfficeofGeneralCounsel.RuthconcentratesoncomplexissuesfacedbyparAcipantsintheinvestmentmanagementandvariableinsuranceproductsindustriesandcounselsfinancialservicesclientsonabroadrangeofregulatory,governance,productdevelopmentandenforcementissues.SheassistsclientsinrespondingandadapAngtoexpandedregulaAonoftheirindustrybytheCommodityFuturesTradingCommission(CFTC)andtheNaAonalFuturesAssociaAon(NFA).RuthisafrequentauthorandlecturerontopicsaffecAngherclients.Inrecentyears,shehasco-authoredfour“friendoftheCourtbriefs”inmaKersofcriAcalimportancetotheindustry,includingtwointheU.S.SupremeCourt–Jonesv.HarrisAssociatesLP(standardforreviewofadvisoryfees)andJanusCapitalGroup,Inc.,etal.v.FirstDeriva,veTraders(responsibilityforstatementsinmutualfundprospectuses).Asco-chairoftheAmericanBarAssociaAon’sSub-CommiKeeonSecuriAesAcAviAesofInsuranceCompanies,RuthtookanacAveroleinthedebatesurroundinganumberofimportantregulatoryiniAaAvesaffecAngfundsandvariableproducts,includingtheSEC’ssummaryprospectusandXBRLproposals.SheisacAvelyinvolvedwithclientsandindustrygroupsindialoguewiththeCFTCregardingtheCFTC’sregulaAonoffundsandadvisers,inconnecAonwithrelatedrulemakingproposalsandissuanceofinterpretaAveguidance.


JohnM.BakerJohnBakerfocuseshispracAceoncomplexsecuriAeslawandbankingissuesformutualfundsandtheirboardsofdirectors/trustees,investmentadvisers,broker-dealers,banks,hedgefundsandotherparAcipantsinthefinancialmarkets.JohnisknownthroughoutthemutualfundindustryasthecreatorandmoderatorofFundLaw,aleadingonlinediscussiongroupthatreportsdevelopmentsandchangesinsecuriAeslaw,withanemphasisonlegalissuesimpacAngtheinvestmentmanagementindustry.PriortojoiningStradleyRonon,JohnwasseniorcounselforaleadingBostonfinancialinsAtuAon,whereheservedastheprimarylegaladvisortothebankinitsroleasinvestmentadvisertomutualfundswithmorethan$9billioninassets.FollowingaclerkshipwiththeHon.BoyceF.MarAnJr.oftheU.S.CourtofAppealsfortheSixthCircuit,JohnwasanassociateandofcounselwithaMassachuseKslawfirm.HealsoservedastheformervicepresidentandgeneralcounselofChildWorldInc.,a151-storetoyretailer.


NicoleM.KalajianNicolerepresentssecuriAes,commodiAesandcryptocurrencyprofessionalsinavarietyofregulatory,complianceandcorporatemaKers.Shehasextensiveexperiencewithrespecttohedgefunds,commoditypools,privateequityfunds,cryptocurrencyfunds,venturecapitalfunds,realestatefunds,fundoffundsandsociallyresponsibleinvestmentvehicles.Nicoleprovideslegalandcomplianceguidancetoregisteredandexemptinvestmentadvisers,commoditypooloperators(CPOs),commoditytradingadvisors(CTAs),introducingbrokers(IBs),forex(FX)firms,proprietarytradingfirms,futurescommissionmerchants(FCMs)andbroker-dealers(BDs).NicoleprovideslegalandcomplianceguidanceconcerningthelaunchofsecuriAestokenofferings(STOs),i.e.,compliantiniAalcoinofferings(ICOs).Shealsoservesascounseltoboards,mutualfundsandexchange-tradedfunds(ETFs).

Nicoledraysanddevelopsofferingdocuments,compliancemanuals,policiesandprocedures,corporatematerials,businesscontracts,investmentagreementsandadverAsingmaterials.Shealsoprovideslegalandstructuringguidanceconcerningmaster-feederstructures,domesAcandforeignfunds,internaAonalofferings,separatelymanagedaccountsandrobo-adviserplacorms.

NicoleisaFounderoftheInvestmentNetworkandtheDigitalAssetsWorkingGroup,andistheDirectoroftheWashingtonD.C.ComplianceRoundtableoftheChicagoRegion.NicolewasselectedasaSuperLawyersRisingStarin2016,2017,2018and2019.


GregoryD.DiMeglioGregDiMegliorepresentsinvestmentcompanies,investmentadvisers,broker-dealers,publiccompanies,boardsofdirectors,boardcommiKees,auditors,otherenAAesandindividualsinconnecAonwithexaminaAons,invesAgaAonsandenforcementacAonsbytheU.S.SecuriAesandExchangeCommission(SEC),DepartmentofJusAce,otherfederalandstateregulators,andindustryself-regulatoryorganizaAons.HealsoconductsinternalinvesAgaAonsdesignedtoassistclientsinprevenAngorlimiAngthescopeofpotenAalenforcementacAon.PriortojoiningStradleyRonon,GregwasaseniorcounselintheSEC’sDivisionofEnforcementinWashington,D.C.DuringnearlyeightyearswiththeSEC,GregwasresponsibleforanumberofsignificantenforcementinvesAgaAonsandacAonsandreceivedaDivisionofEnforcementDirector’sAward.WhileatStradleyRonon,hehasbeennamedmulApleAmestotheBestLawyersinAmerica


PaulaD.ShaffnerPaulaShaffneriswidelyrecognizedasafierceadvocateforclientsinthefinancialservicesindustry.Foralmost30years,PaulahasrepresentedindividualsandcompaniesinsecuriAesliAgaAon,anddefendedclientsinregulatorymaKersbeforetheU.S.SecuriAesandExchangeCommission(SEC),theFinancialIndustryRegulatoryAgency(FINRA)andvariousexchangesandstateregulators.ShealsorepresentsclientsinliAgaAonfiledincourtorarbitraAon.PaulaconductsinternalinvesAgaAonsandprovidescompliancecounseling.Herclientsincludepubliccompanies,mutualfunds,hedgefunds,investmentcompaniesandadvisers,brokerdealersandindividualsassociatedwiththoseenAAes.


cryptocurrency legal roundup – securies, derivaves

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