Marc Boiron is a partner in the Corporate, Technology, FinTech and Blockchain practice groups. Marc represents leaders in blockchain and other distributed ledger technologies and digital currencies that operate businesses abroad number of industries, including ad tech, ecommerce, energy, healthcare, mobile apps, music, payment systems, real estate, and video games..
Before joining FisherBroyles, in early 2017, Marc founded and led the Blockchain, Smart Contracts and Cryptocurrencies practice group of Rutan & Tucker, LLP. Combining Marc’s strong corporate and securities law background and his near obsession with blockchain technology, he built a practice advising companies on a breadth of issues, including ICOs, STOs, smart contracts, cryptocurrency funds, cryptocurrency exchanges, and other cryptocurrency laws. Marc also advised early stage companies in traditional and crowdfunding financings, using exemptions like Reg D, Reg A+ and Reg CF.
Marc was trained in Delaware law at Richards, Layton & Finger, one of the most recognized law firms in the country by other lawyers. He represented companies like Allergan, Dell, and General Electric in a broad range of transactions.
Mr. Boiron is often invited as a speaker on issues relating to blockchain technology, especially to educate on constant developments in blockchain and ICO regulations.
Hi, this is Amy Wan with Security Token Academy. I’m here again with Mark Boiron and we’re here to talk about some updates in SEC and security token regulatory items, right?
Thanks for having me. I’m looking forward to it.
The first thing let’s talk about is news about off-shore developments. Can you elaborate on that?
Sure. One of the things everybody’s going to remember is that offshore offerings were like the hot thing, especially once the SEC started cracking on things, the thought was, let’s just sell our securities offshore and then we’re going to be free.
While there’s tons of issues under Reg A and that kind of stuff, one of the key questions that people didn’t talk about a lot was does the SEC even have jurisdiction to go after those? That always was two questions.
One is from a legal perspective, do they have jurisdiction? The other one is practically speaking, can they go do it?
I think practically speaking, they’ve already proven that they can with one broker when they seized the domain name with the FBI. The other question is from a legal perspective, could they?
The background to that actually goes back a few years. The question was always there was legislation in the Dodd Frank Act that actually addressed the fact that the SEC had very, very broad rights to actually go after anyone making a securities offering offshore.
The Dodd Frank Act essentially addressed that, but it was done at the same time as the Supreme Court offering, literally a month apart. Wording in the legislation is very strange. It was never clear whether they meant to address it and limit the SEC’s jurisdiction or not.
Essentially, what we ended up seeing is a couple years ago, there was a case where a district court essentially decided that sure, the legislation didn’t directly address it, but the legislator meant to address it.
Now we’ve had an appeals court, just a couple days ago, a couple weeks ago, that has addressed it as well and has basically said, yes, the Supreme Court was actually trying to go ahead and give the SEC some limitations, I mean, some expansion of the SEC’s jurisdiction.
What does this mean for issuers?
Bottom line if you did an offshore offering and you thought the SEC wouldn’t have jurisdiction, it’s not necessarily going to be the case.
What is the basis for that line of thought?
Really, it’s a question of, if this issuer didn’t really have anything to do with the U.S. or its effect of what it did in the U.S. wasn’t really substantial in any way, then why should the SEC have jurisdiction?
Very interesting. The other big piece of news this week is that Kik came out and basically made a row in the committee about the fact that they’re fighting the SEC. In December, they submitted a well submission and now they’re out in public talking about their exact line of reasoning and argumentation about why they’re not a security. Can you tell us more about that?
Sure. This is what the crypto-community has been waiting for, a company that is capitalized at somewhere around 92, 93 million dollars in an ICO that is essentially saying, “We’re not just going to take what the SEC tells us and settle with them. We’re going to go fight this.”
The SEC has sent them what’s referred to as a Wells notice that said, “Hey, we’re going to give you a chance to explain to us why we shouldn’t bring an enforcement action against you.”
In December, two big law firms submitted that to the SEC. Then, as you said, the CEO decided to come out and say, “Alright, here you go. Let’s make it public. We’re going to show you what we submitted, because we’re ready to fight. Whether the SEC decides to take us up on this or not.”
There’s arguments come down to three things. Number one, Kin, which is their token is a currency, not a security. Now the interesting thing about that, people always say, a currency is excluded from the definition of a security. That exclusion is actually in the Securities Exchange Act, not in the Securities Act of 1933.
The argument would be well, they excluded it from the Exchange Act./ They never said anything about it in the ‘33 act, so they meant to exclude it from there as well or it should be treated as excluded.
Bottom line if you look at the federal law, how currency is defined, it’s usually limited to kind of Fiat currencies backed by some kind of government. It’s not some currency that two people decide to invent and call a currency.
I don’t think that argument is shot down easily, but I’m not sure it’s going to necessarily go very far.
Then, the next one is the argument you would’ve expected. This was not an investment contract whatsoever. The argument is Kik which is essentially a messenger app had a pretty robust community that had a point system before they ever even did an ICO. The problem is this point system was pretty limited in the way that it worked. The idea was if we can have a more free-flowing crypto-currency, it’s going to help build a more robust community.
They went ahead and did an ICO. They used a SAFT and then did a public sale afterwards.
The real question is going to be on that two things. One, when you dig in to the communications that they had with private issuers, what did they say? Pantera Capital Investment. When they spoke to Pantera or emailed Pantera or sent text messages to people at Pantera, what did they say?
The second thing is, and that goes to the expectation of profit. Then the question is if you have the efforts of others prong, maybe a question is were they sufficiently decentralized under the Hinman test, which was often mentioned in the Wells submission. Were they sufficiently decentralized?
There’s a problem there. One is, were they sufficiently decentralized at the time of their ICO? Versus are they sufficiently decentralized now?
Which now they have a pretty robust ecosystem with 30 apps, my understanding is, built on top of it. I don’t know what their ecosystem was back then, but that’s a big question.
Their last argument was kind of amusing, but one that everybody was relying on at the time, was let’s assume you don’t agree with us that it’s a currency. Let’s assume that we sold an investment contract. Just take it easy on us because we did it better than the others. That was literally -
Is that really it?
That was literally the argument.
Oh, my goodness. And how do you think the SEC is going to react to that one?
It’s what they’ve done so far. Not necessarily that thought. They took it easy on Paragon. They took it easy on Aerofox. For something like Kik, I think they would have taken on it easy. Now that they’ve gone and publicly said we will defy you-
I don’t think it’s going to be that easy. The question is whether it’d be wise for the SEC to actually take this up.
What’s going to happen is the SEC Commissioners are going to vote on whether they actually bring in enforcement action. That could be an administrative proceeding or a court feeling.
Realistically, this will be a close call. A court filing is a little risky for them. They lose that, it doesn’t look so good. If they’re going to do something, it’s probably going to be some kind of administrative proceeding, which still might not look good if they lose, but it’s going to be quieter at least.
Very interesting. Thank you so much for giving us the updates on the state of SEC and token law today.
Always glad to do it.
Alright, this is Amy Wan with Security Token Academy.
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