Did the US put forth groundbreaking new securities regulation in 2018? No, but the SEC provided a number of increasingly explicit reminders about the application of existing securities laws to cryptocurrency transactions—particularly ICOs.
The public enforcement actions during the past month against Airfox, Paragon, Floyd Mayweather and DJ Khaled provided concrete proof that the SEC is indeed serious that token issuers and promoters follow long-established guidelines around the issuance of securities. Token issuers can’t afford to be cavalier about SEC rules. None of this should be surprising, by the way. The SEC has been nothing, if not consistent, in making sure that any participant in US capital markets plays by the rules.
The regulatory deficiencies often come to light when an ICO fails. ICO failures come in many flavors, but the most common is a failure of expectations. Many projects’ whitepapers over-promised and under-delivered. Along the way, however, these flops shined a bright light on their failure of business fundamentals:
- Regulatory failures. Problem number-one, front and center: many projects ignored seemingly clear guidance from the SEC as well as established securities law, and issued unregistered securities.
- Accounting failures. When it comes to cryptocurrency, accounting guidelines such as GAAP and IFRS have been largely ignored.
- Investor relations. Ensuring consistent, honest communication with early investors to the platform has not been a priority for many ICOs.
- Intellectual property protection. Many platforms had excellent ideas to bring to market, yet have not adequately registered or otherwise protected the underlying intellectual property, thus eroding the value proposition for early investors.
Many of these issues are fixable, but the clock is ticking. Regulatory bodies will be less lenient on corrective filings as time goes by, and investors will be less patient if projects don’t take proactive steps to get back on track. Again, none of these problems are unsolvable. Some will require money. Most will require expertise. All will require effort.
Here are the curative steps for any project falling into that category of “over-promised and “under-delivered”:
- Assess the status of the project, including what was raised, in what type of offering, by whom, from whom, and where that money resides.
- Assess the registration and compliance requirements based on the investors on board.
- As needed—and it is probably always needed—contact the SEC on a proactive basis, with a remedial plan in hand.
- Complete financial accounting.
- Develop a marketing plan around re-engaging investors and the public at large on the project.
- Contact investors, and let them know what you are doing and why.
- Get to work on the business itself!
What Airfox and Paragon show are a path to compliance, with a real but fair penalty, but there is concern that the penalties will grow increasingly onerous with time. The guidance from the SEC now constitutes ample warning for those who know—or should know—that they have problems and should take steps to fix them.
Over the coming year, expect the market to flush out the flimsiest ICOs, as well as force any needed business corrections for the strongest contenders. Some projects have a great blueprint. They just need help getting compliant. New programs built to clean up the space, such as Crypto Janitors from BX3 Capital, can help ICOs correct regulatory failures and usher in a new wave of real, solidly built blockchain-based businesses.
About the Author
Mike joins BX3 Capital after more than 20 years as an international tax attorney and entrepreneur. He has seen virtually every aspect of international taxation, having worked for the Internal Revenue Service, in private industry, and for Big Four public accounting and tax consultancies KPMG and PwC. Mike was a founding partner of WTP Advisors, a boutique international tax consulting firm that specialized in assisting the world’s largest companies with the thorniest of tax structuring and compliance issues.
Over the years, Mike has also founded or co-founded several other tax-focused start-up ventures. After the successful sale of WTP in 2014, Mike joined the International Income Tax practice of Ryan LLP, a specialized tax structuring and compliance issues. Over the years, Mike has also founded or co-founded several other tax focused start-up ventures. After the successful sale of WTP in 2014, Mike joined the international income tax practice of Ryan, LLP, a specialized tax service firm, where he stayed until his early retirement, at the age of 47. Mike has exited retirement earlier than anticipated to work in the exciting technological revolution that is blockchain.
Utilizing his experience as an entrepreneur, attorney, and taxation expert, he is helping guide BX3’s clients through the highly nuanced legal, financial and tax issues of this nascent space. Mike holds both a BBA (Finance) and a JD from Pace University, and an LLM in Taxation from New York University. He is admitted to practice law in New York and Connecticut, with admission pending in the District of Columbia.
His entrepreneurial feats were chronicled in Fortune’s “David vs. Goliath” segment, and he has been a frequently used source by the Wall Street Journal on matters related to international taxation. He has written numerous articles and lectured copiously on taxation issues, and has also served as a visiting professor at Fairfield University’s Dolan School of Business.