F. Dario de Martino, Spencer D. Klein, and Mara Elyse Goodman
Mergers + Acquisitions and Emerging Companies + Venture Capital
On January 22, 2018, the Chairman of the U.S. Securities and Exchange Commission (SEC), Jay Clayton, gave opening remarks at the Securities Regulation Institute during which he took the opportunity to warn market professionals to “act responsibly and hold themselves to high standards” with respect to token sales, also known as initial coin offerings (ICOs). 
Chairman Clayton’s speech reiterates the SEC’s clear pronouncements regarding ICOs, including its plan to continue bringing enforcement actions against ICOs conducted in violation of the U.S. securities laws, and to monitor all ICO market participants (i.e., not only issuers, but also finders, promoters, broker-dealers, investment advisers, exchanges, lawyers, accountants, and others).
In his remarks, Chairman Clayton urged ICO market professionals to “do better” and “bring expertise, judgment, and a healthy dose of skepticism to their work.”
Despite his previously fired warning shot—“I have yet to see an ICO that doesn't have a sufficient number of hallmarks of a security”—some market participants are still taking risks and conducting tokens sales without complying with the registration requirements of the U.S. federal securities laws or relying on an applicable exemption.
Chairman Clayton emphasized that he has instructed the SEC staff to be on “high alert for approaches to ICOs that may be contrary to the spirit of our securities laws and the professional obligations of the U.S. securities bar.”
These warnings are consistent with the SEC’s guidance provided to ICO market participants over the past year:
On a more positive note, the SEC also acknowledged that “it is possible to conduct an ICO without triggering the SEC’s registration requirements,” providing the example of a private placement conducted in reliance on Regulation D of the Securities Act. Indeed, several judicious market participants have structured token sales in reliance on an exemption from the registration requirements of the U.S. federal securities laws and in compliance with other applicable laws. In this regard, several token sales have been conducted in reliance on Rule 506(c) of Regulation D of the Securities Act (including Filecoin’s $257 million ICO). Additionally, in light of most market participants’ desire to establish a trading market and offer liquidity for their investors, we expect to see an increasing number of token sales to be conducted in reliance on Tier 2 of “Regulation A+” of the Securities Act.
Below is a summary comparison of the main features of these two exempt offering alternatives.
Exempt Offering Alternative
Maximum Size of Offering
Prohibition on General Solicitation or Advertisement
Type of Investors
Filing or Reporting Requirements
No, provided that all purchasers are accredited investors.
All purchasers must be accredited investors.
Issuer must take reasonable steps to verify accredited investor status.
Yes. File Form D with the SEC not later than 15 days after first sale.
No ongoing reporting requirements.
Yes. Purchasers cannot freely resell restricted securities to the public without an available registration exemption.
Tier 2 “Regulation A+”
Up to $50 million over a 12-month period.
The offering need not be limited to accredited investors.
Offering documents must be filed with, reviewed by and “qualified” by the SEC.
Issuer is subject to ongoing reporting requirements.
Purchasers can freely resell to the public.
While this alert is focused on compliance with the Securities Act in connection with an ICO, if a token is a security, market participants also must consider SEC regulations related to broker-dealer registration and operation of a secondary market trading platform as well as other potential regulations.
There is certainly “no one size fits all” structure. However, as the blockchain industry matures, we hope that all market participants will conduct token sales in compliance with all applicable laws, offer investors the protection of our securities laws, and continue to drive innovation for years to come.
F. Dario de Martino is a Corporate and M&A attorney in New York, and serves as co-chair of Morrison & Foerster’s Blockchain Practice. Spencer D. Klein is a Corporate and M&A partner in New York and serves as co-chair of the firm’s global Mergers & Acquisitions Group and as head of the New York Corporate Department. Mara E. Goodman is a Corporate and M&A attorney in New York.
Morrison & Foerster’s Blockchain Practice provides a holistic, comprehensive approach to blockchain and cryptocurrencies. Our cross-practice, cross-industry global team unites thought leaders from our corporate, securities, regulatory, tax, data security/privacy, and other practice groups, and provides our clients with cutting-edge knowledge and strategic guidance.
 If you are interested in an introduction to blockchain and cryptocurrencies, see https://www.mofo.com/special-content/blockchain-smart-contracts.
 See Chairman Jay Clayton, “Opening Remarks at the Securities Regulation Institute” (January 22, 2018), available at https://www.sec.gov/news/speech/speech-clayton-012218.
 See Wall Street Journal, “SEC Chief Fires Warning Shot Against Coin Offerings” (November 9, 2017), available at https://www.wsj.com/articles/sec-chief-fires-warning-shot-against-coin-offerings-1510247148. Subscription may be required.
 See “Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO” (July 25, 2017), available at https://www.sec.gov/litigation/investreport/34-81207.pdf.
 See SEC v. W.J. Howey Co., 328 U.S. 293 (1946).
 See “Protostarr ICO shut down by SEC” (September 7, 2017), available at https://cointelegraph.com/news/protostarr-ico-shut-down-by-sec.
 See “SEC Announces Enforcement Initiatives to Combat Cyber-Based Threats and Protect Retail Investors” (September 25, 2017), available at https://www.sec.gov/news/press-release/2017-176.
 See “Statement on Potentially Unlawful Promotion of Initial Coin Offerings and Other Investments by Celebrities and Others” (November 1, 2017), available at https://www.sec.gov/news/public-statement/statement-potentially-unlawful-promotion-icos.
 See “SEC Emergency Action Halts ICO Scam” (December 4, 2017), available at https://www.sec.gov/news/press-release/2017-219.
 See “Order Instituting Cease-and-Desist Proceedings pursuant to Section 8A of the Securities Act of 1933, Making Findings, and Imposing a Cease-and-Desist Order” (December 11, 2017), available at https://www.sec.gov/litigation/admin/2017/33-10445.pdf.
 See “SEC Halts Alleged Initial Coin Offering Scam” (January 30, 2018), available at https://www.sec.gov/news/press-release/2018-8.
 See “Statement on Cryptocurrencies and Initial Coin Offerings” (December 11, 2017), available at https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11.
 See “$257 Million: Filecoin Breaks All-Time Record for ICO Funding” (September 7, 2017), available at https://www.coindesk.com/257-million-filecoin-breaks-time-record-ico-funding.
 Please note this summary comparison does not purport to be comprehensive, or set forth all available exemptions that may be available. For a more comprehensive summary chart, please see Morrison & Foerster LLP “Summary Chart of Exempt Offerings Alternatives,” available at https://media2.mofo.com/documents/151118exemptofferingalternativeschart.pdf.
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