A few years ago, we spent a lot of time with the Staff of the Division of Corporation Finance discussing the meaning of Rule 261(c) of Regulation A. “Rule 261 says Regulation A is for equity, debt or convertibles,” they would say (in more formal terms). “These things you are trying to qualify don’t look like debt or equity to us.” And indeed, these things – innovative security structures that did not exist when Reg A was amended in 2015 – do not look like traditional securities, which is kinda the whole point.
In the end, we did get some of these “crypto adjacent” instruments through the Reg A qualification process. Not without a lot of back and forth, and sometimes it took years. And, in some cases, with bizarre results like the instrument that was deemed to be equity for securities law purposes and debt for GAAP purposes. Or was it the other way round?
In any case, we seem to be approaching a major shift in the way crypto is dealt with under the securities laws. There will likely be legislation defining some crypto instruments as not securities. That may take a while, and may not cover everything that the SEC considers to be securities.
In the meantime, and for the instruments that do not get carved out of the definition, could I suggest that Reg A might be the answer to the “You tell us to register crypto but the registration process doesn’t work for us” issue? Reg A is available for offerings up to $75 million a year. Its disclosure requirements are more straightforward than those for registered offerings.
This would, of course require a more flexible attitude to Rule 261(c). That rule is based on the specifically enumerated list of securities that are covered by the Small Issues Exemption, in Securities Act Section 3(b)(3), but crypto wasn’t a thing when the JOBs Act amended Reg A. And we have seen the SEC take a – shall we say robust? – approach to statutory provisions when it comes to rulemaking for online capital formation in the past. (And yes, securities law nerds, I am cynically assuming that Loper Bright would not be applied here because we are talking deregulation.)
With new leadership at the SEC to come, do we think this could be a solution?