Americans know how to invest and love doing it, but due to the subtleties of U.S. law, they cannot take part in the vast majority of ICOs. They do so only if the proposed token is registered with the Securities and Exchange Commission, and any investment in it will not contradict the wording of the law. But who wants to mess with the official bureaucratic machine? We tried to figure out whether the procedure of registering a token in the SEC is so terrible and found five reasons why it should be done.
Reason One: The Expansion of the United States
While studying the white paper of a project, you probably faced the restriction on participation in the ICO for residents of the United States. Where does such discrimination come from and why do companies deliberately refuse creditworthy American audience? The answer lies in the reluctance to follow American laws, according to which, security tokens—as well as individuals and organizations engaged in the exchange of tokens—must be registered with the SEC. The Securities and Exchange Commission was established under Roosevelt in the thirties of the last century as one of the tools out of the Great Depression. The companies outside the USA must comply with the requirements if they expect to have U.S. residents as participants.
Reason Two: Almost All Tokens Are Security Tokens
To determine whether a token is a security and whether you need to know anything about the SEC at all, you can use the Howey test. The test will ask whether the purchase of tokens is an investment of money or other assets in some kind of common enterprise; whether there is the promise of profits from these investments; whether the investor can influence the earnings in any way or they depend entirely on the activities of third parties. If the token fails the test, then don’t even try to mask it as a utility.
Reason Three: The SAFT Has Lost Its Super Powers
So what can be done if the token refers to securities by its characteristics, and you do not want to lose Americans as investors? You can, for example, do as Pavel Durov did. When deciding on the Telegram token sale, Durov conducted it according to the SAFT format (Simple Agreement for Future Tokens), that is, he did not sell the tokens themselves, but the right to their possession after issuance, which will occur only after the end of the investment and development period. This concept was proposed in 2017 by Cooley LLP lawyer Marco Santori, and so far, it has helped many circumvent the SEC’s punishing blade. The Commission, however, knows about this loophole and is nervous, so it definitely does not like projects with a token sale conducted through SAFT. And being “on the list” with these guys is not a pleasant experience.
Reason Four: Crowdfunding Is Not an Option
Masking under crowdfunding is not easy, either. To do this, you must be at least registered in the United States as a broker-dealer or crowdfunding platform. That is another circle of bureaucratic hell in the SEC.
So we offer to put up with the letter of American law, be patient, and have a budget for lawyers and storm the SEC to register your token as a security.
Reason Five: The Invaluable Experience of Tackling Bureaucratic Obstacles
As part of the preparatory stage, you will not only create an impressive white paper but also conduct an audit of the financial condition of the company. Audited reports are a mandatory appendix to the application for registration of a token with the SEC, as well as a memorandum on risks (the one submitted by Durov was ten pages long, by the way).
An application for registration of a security token is carried out in the S1 form, which can be found on the official website of the Securities and Exchange Commission. If you are lucky with an intelligent lawyer, they will be able to use the amendment allowing startups to undergo a simplified registration process. To do this, you will need to prove that your income is less than $50 million per year and fulfill a number of conditions, described in detail in the manual for small companies.
All document flows in the SEC are carried out in the EDGAR electronic data collection, analysis, and extraction system. You can get access to EDGAR only by providing the SEC with information about the company in electronic form and a printed copy certified by a notary public. Having received the access keys, you will be able to apply to the SEC.
Look for Helpers with IPO Experience, at Least
As you can see, it is difficult without having a personal representative in the U.S. And the most reasonable thing here would be to hire an experienced American lawyer and accountant because the probability of independently sorting out the applications and amendments of the law on registration of securities tends to be in the area of negative numbers, and you can save money and nerves on knowing the necessary loopholes. Look for experts with experience in public offerings. The rules of the Commission are constantly changing, and the new amendments can be learned only through practice.
It is worth forgetting about any ICO advertisements before registering a token with the SEC, as such actions are considered by the Commission as premature and can cause serious difficulties when reviewing your application.
Be prepared for the fact that the process of preparing documents for submission to the SEC takes an average of three months. Given you have already found the lawyers, auditors, and translators you need, and at the very least have all the necessary content in Russian. Content refers to a description of a company’s property and activities, a description of a token and its financial model, information on company management, financial statements certified by third-party accountants, and a risk memorandum warning potential investors about possible troubles.
Life After a Visit to the SEC
After applying, waiting for a response from the SEC does not take long; as a rule, the Commission reviews appeals within four to six weeks. During this time, they will assign to your application a responsible division of corporate analysis and research and a specific person responsible for the entire registration procedure. The Corporate Finance Department will review the reports and auditors’ files, and a separate specialist will review the request for confidential review and decide whether to satisfy it.
You should not wait for the allotted 30 days for consideration since this rule is recommendatory for the Commission. It is best to contact the reviewer after five to seven days after submitting the registration application and find out when to wait for comments. After receiving the comments from all the SEC’s responsible departments, prepare to respond to them. This will be a difficult time for your lawyers since they will have to work out every remark and decide whether to add any changes to the white paper and whether to provide the Commission with additional documents to solve the issues or whether to accept the comments as unfounded or unfair and file an appeal.
What can be done by those who have despaired after the mere theory of registration with the SEC? First, do not despair, any experience of bureaucratic communication will expand your competencies, and next time, everything will be easier. Secondly, it is worth remembering that the SEC can not only penalize violators of U.S. law but also imprison them for up to five years. And nobody wants to go to jail.
Now imagine that you voluntarily gave up millions of Americans, one of the most investing nations, and made an ICO for the inhabitants of the rest of the planet. What will prevent your competitors from organizing the participation of a U.S. resident in your token sale and providing evidence to the SEC of this participation? We have unpleasant news, but the notice on the website and in the white paper that U.S. citizens cannot buy a token does not relieve the company from responsibility if such a deal is proved to have taken place.