On March 26, 2020, the Bitcoin Law Review Crew got back together to discuss the latest and greatest of the Regulatory side of Bitcoin.
Topic 1: Telegram ICO
Quick Take from the Block article by Stephen Pally
• NY federal court enjoins issuance of GRAMS promised in Telegram’s $1.7 billion SAFT offering
• Court finds that the token issuance likely violates U.S. securities laws under established precedent
• Order is interim but likely to be reduced to a permanent injunction
1. Court ruled that “considering the economic realities under the Howey test, the Court finds that, in the context of that scheme, the resale of Grams into the secondary public market would be an integral part of the sale of securities without a required registration statement.”
2. Also, “reasonable purchasers would not be willing to pay $1.7 billion to acquire Grams merely as a means of storing or transferring value. Instead, Telegram developed a scheme to maximize the amount initial purchasers would be willing to pay Telegram by creating a structure to allow these purchasers to maximize the value they receive upon resale in the public markets.”
Fun facts from Coindesk Article by Anna Baydakova
1. The SEC has asked the High Court of England and Wales to obtain the testimony and documents from John Hyman, a former investment banker with Morgan Stanley and Renaissance Capital who resides in the U.K.
2. Hamid, in turn, told Durov that blockchain was “an active area of interest for me and Kleiner Perkins. At my previous firm, Social Capital, we invested 2% into BTC in 2013 and we were one of the biggest investors in the DCG (Digital Currency Group) since 2011,” Hamid wrote.
3. Although TON investors were strictly forbidden to resell their allocations under the threat of losing their future grams, the secondary market, in fact, flourished, with multiple offerings from small exchanges, brokers and individual OTC dealers, as CoinDesk previously reported.
4. According to the SEC information, Hyman left his job at Telegram and is now working at Gram Vault, the custodian for grams that earlier claimed to be working with TON’s largest investors. Gram Vault has also negotiated the listing of grams at the crypto exchange Poloniex, explaining that Telegram itself can not do so.
5. This is the first time a SAFT has been tested in Federal Court, it looks as though they may be securities. Many ICO issuers may be in trouble if the SEC were to actually able to find the teams this many years later.
6. Selling the grams on the secondary market is not going to be allowed. This preliminary injunction can be appealed in the second circuit.
Topic 2: Kik ICO
Quick Takes from The Block Article by Yilun Cheng and Decrypt Liam Frost:
Canadian software company Kik, who was subsequently purchased by Media Lab, is seeking pre-trial judgment amid the SEC’s claim that it has failed to provide sufficient evidence in defense of its $100 million unregistered tokens sale in 2017.
Kik has a 300-million userbase on its messaging app, but had to lay off a lot of staff because of its legal fees.
Company’s CEO, Ted Livingston, said he would fight the SEC until they don’t have a dollar left. Both Kik and the SEC filed for summary judgment on March 20 in the SDNY.
SEC said Kik has “no cognizable defense” to selling unregistered securities in violation of Section 5.
Kik said they did two sales, a pre-sale to accredited investors and a public sale. Kik filed its Form D for the presale, and says the second sale does not count because they didn’t promise any returns on the investment.
“Pre-sale and TDE were distinct sales of different assets, to different parties, under different contracts and for different consideration,” Kik’s memorandum said. “Kik therefore is entitled to summary judgment on the SEC’s claim that they were somehow a ‘single’ or ‘integrated’ offering.”
“Kik’s affirmative defense is that the term ‘investment contract’ is so vague that Kik lacked notice it might apply,” said Shapiro. “The fact that it took out insurance to cover the risks shows that it was far from lacking notice—one among many reasons why ‘investment contract’ is not unconstitutionally vague,” Shapiro told Decrypt.
The SEC said, “Investors bought Kin in such large quantities that their purchases only can only be logically explained by an expectation of profits”
The prolonged legal dispute with the regulator proved costly for Kik. Its 300 million-strong messaging app was almost shut down last October, and the Kik corporation laid off the bulk of its staff. With emptied coffers, can Kik hold on long enough to fight its cause?
Topic 3: Tezos Settlement
Federal Plaintiffs sue the Settlement class, Dynamic Ledger Solutions, the Britmans, and Tezos foundation. Claims are discharged and released against Tezos. Claims against tezos were that they did an ICO, in violation of the Securities Act. Tezos is released from claims. They had to pay an undisclosed amount and the attorney fees. The court appoints a claims administrator to oversee the settlement distribution among plaintiffs.
Topic 4: Ripple Case
Ripple case allowed to continue in California, under Federal law. “Based on plaintiff’s complaint and the judicially noticeable facts proffered, the court cannot conclude that defendants’ first bona fide public offer to sell XRP occurred before August 5, 2016,” she said.
Topic 5: SEC vs Steven Segal
90s legend Steven Seagal was Charged by SEC for Promoting an ICO in 2018. He failed to disclose that his endorsement was paid for. Celebrities are not allowed to use their social media influence to tout securities without appropriately disclosing their compensation,” noted Kristina Littman, Chief of the SEC Enforcement Division’s Cyber Unit. He had to pay the SEC $330,000. Segal was supposed to receive $250K in cash and $750K worth of B2G tokens, but he actually only received $157K despite doing all the agreed upon work. He had to pay back double what he earned plus $16K in prejudgement interest.
Topic 6: CFTC
The CFTC issued guidance that clarified the actual delivery exception to the CEA with respect to digital assets that serve as a medium of exchange. If the transaction gives the purchaser full possession within 28 days, even if it was purchased using leverage or margin, it’s exempt from the CEA.
The CEA regulates digital asset trading and broker registration requirements, treated as if the transactions were future contracts. Unless the contracts result in actual delivery of the virtual asset within 28 days of the date of transaction. Actual delivery of a retail commodity transaction involving virtual currency occurs when a customer secures (1) possession and control of the entire quantity of the commodity, whether it was purchased on margin, or using leverage, or any other financing arrangement, and (ii) the ability to use the entire quantity of the commodity freely in commerce (away from any particular execution venue) no later than 28 days from the date of the transaction; and (2) the offeror and counterparty seller do not retain any interest in, legal right, or control over any of the commodity purchased on margin, leverage, or other financing arrangement at the end of the 28 days.
The digital asset space is a nascent, evolving, incredibly innovative space, with the potential to offer great efficiencies and enhancements to the markets. This interpretation is not designed to stifle this innovation. Instead, it seeks to strike the appropriate balance between protecting the general public from bad actors and financial harm and providing a functional, adaptable regulatory framework to a rapidly evolving business. As the guidance notes, the Commission will continue to follow developments in the virtual currency markets, evaluating business activities on a case-by-case basis.
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