By and large, crowd funding is nothing more than sourcing small amount of capitals from a large pool of interested investors. These individuals may be venture capitalists-completed through a private session, or from the public where relevant laws apply. Considering the evolving nature of crypto and blockchain where each project has on the table different objective, a unique value proposition with the goal of rolling out solutions to a germane problem, the aim of project creators is to raise money faster in a bid to meet their goal.
After the ICO mania of late 2017, the space is more mature and efficient while regulators are pressing charges against scam projects and exchanges are kind off intervening. Through initial exchange offerings (IEOs) projects now have an avenue for investing through a liquid, secure and perhaps a regulated on-ramp, but there is a problem.
The IEO Question
Just so that there is clarity, John Reed Stark, the President, John Reed Stark Co, defines an IEO as “a crypto-financing model offered and administrated via a cryptocurrency trading platform on behalf of a company (typically some form of start-up) that seeks to raise funds with its newly issued cryptocurrency digital tokens. Each IEO negotiates its unique terms, deals, and conditions with the various cryptocurrency trading platforms.”
Based on the above, Jeff Dorman, a former analyst at Merrill Lynch and Lehman, extrapolates and he is of the view that exchanges offering these launching pads are illegal broker dealers and issued tokens are to him, securities. As a result, they are technically compliant to US SEC laid down laws. Based on his past experiences spanning over 20 years, he explained that the nature of IEO token issuance means US citizens cannot partake.
It is easy to see why. From Securities Exchange Act of 1934, it is “effect a transaction in securities” or “attempt to induce the purchase or sale of, any security” unless there is registration as a broker or dealer as laid down by FiNRA, whose task is to regulate brokers and dealers. By charging marketing, facilitation or any other fee for conducting an IEO, these exchanges are demanded by law to register as brokers or dealers.
The SEC Whip?
John Reed now argues that unregulated crypto exchanges are floating this rule, actively issuing out securities. With the ground set, John is confident that the SEC can beginning cracking down on IEO purveyors, promoters and any other facilitators expelling them from the US market. That’s unless of course there is a registration which he terms it as “sacrosanct” because they are first and foremost, gate keepers, purposely meant to secure and protect investors’ interest.
Expressing her views on IEO, Valerie Szczepanik, the US SEC Senior Advisor on Digital Assets, said:
““Most obviously, cryptocurrency trading platforms seeking to list these tokens for a listing fee or bring buyers to the table for issuers are probably engaging in broker-dealer activity . . . If they are not registered, they will find themselves in trouble in the U.S., if they have a U.S. issuer or U.S. buyers, if they are operating on the U.S. market.”
This comes amid word that Poloniex had “geo-fenced” nine digital assets as a counter measure against uncertainty around US SEC steps and potential retribution. Although it is yet to be confirmed, the US SEC could end up purging some digital assets from being traded in the US. In response, Fred Wilson of Union Square Ventures says these assets could find safe refuge in jurisdictions within Asia despite the possibility of rogue elements taking advantage and destabilizing the crypto ecosystem. Citing Tether Limited, the official issuers of USDT, and the unmonitored space where fake volumes are rampant, he asserted that there is need for complete clean up in the space.
The Pass to Asia
This makes sense. Asia is steps ahead in terms of blockchain and crypto adoption. Ripple has a foothold in South East Asia and just recently, Samsung, a South Korean company, offered support for Ethereum and several crypto assets. HTC is following suit and Chinese companies lead in the number of blockchain patents. Meanwhile, Japan was the first to support crypto assets, formulating regulations and was a refuge for ICO projects when China and South Korea banned ICOs.