Hi everybody. Welcome. Thanks for joining us tonight. My name is Lyndsi Stevens. I’m the General Manager of the Security Token Academy, and we’re so excited to be here hosting this event tonight. We have a great panel lined up for you. But before I toss it over to Amy to do our panel discussion, I just want to tell you a little bit about what Security Token Academy offers. So our mission is to cover and facilitate the evolution of the security token industry, and we do that through networking events. Last year we put on the first Security Token Summit held in the United States. That was held in New York City at the Conrad Hotel. And about this time last year we hosted the Security Token Industry Launch events. And for those of you who might’ve been there, we left out of the Spirit of New York. That’s just right next door, which was awesome. We’ve done events here, networking events in New York City, also in Los Angeles, and in June of this year we went international and did our first one in London.
In addition to our networking events, we also offer video content. Our Security Token Insight Show is a bimonthly program that keeps you updated on all the latest news as well as presents expert interviews. This year we’ve also added a lot of different types of content to our content mix. So our Director of Strategy, Derek Schloss, who wasn’t able to be here tonight, he helps us go behind the scenes in terms of the companies that are building out the industry through our Digital Wrapper product, which is a text-based product. And over the summer we just launched our Security Token Stories Podcast, and you can find out all about this on our website, securitytokenacademy.com. But I highly recommend that you sign up for our Security Token Edge Newsletter, which will keep you up-to-date on all the new things that Security Token Academy is putting out, as well as any updates, regulatory updates, news about the industry, anything that you need to know or want to know about the security token industry is in that newsletter.
Before I toss it over to Amy, I just want to highlight a couple of people that are here tonight. First, Stephen McKeon, who’s our Chief Strategy Adviser, and we also have a couple of our corporate members with us tonight. Our Corporate Membership Program highlights the leading companies that are building out the security token industry. Some of them are represented here. Clifford Chance is one of them. Stephen Vest, represented here, and also Securitize is here. So thank you guys for supporting us and being here.
We also just over the summer launched our Professional Membership Program, which is for legal experts and attorneys who are helping to give guidance in terms of projects for both the companies that are infrastructure companies in the industry as well as offerings. And so you’ll get to meet some of those people tonight, and if you’re interested in learning more, these are great experts and companies to get to know. So please go to our website and check them out. And also if you’re interested in your company being part of the Security Token Academy, I’d love to discuss that with you.
All right, let’s get to our panel discussion. Amy.
Well, hi everybody. My name is Amy Wan. I am host of Security Token’s Insights. Hopefully some of you guys have seen the show. And I’m also CEO of Sagewise. We have an incredible panel here tonight with regulatory and legal experts. They all know so much more than myself. So I am going to allow you guys to basically go down the row, and if you could give us 60 seconds about yourself and your company.
Yeah, sure. Ari Friedman, General Counsel at SeedInvest. We’re an online leading equity crowdfunding platform in the U.S. We operate through broker dealers. So we help issuers looking to fundraise, raise capital through Reg D, Reg A, Reg CF, and various offering exemptions that are available here in the U.S. We have an investor base of about 275,000 investors made up of both credit and non-accredited investors, and credited including, average angel investors, institutional, retail, and family offices. And we’re also very active in the digital asset space.
Hey, I’m Dave Adams. I’m a Senior Associate at Clifford Chance. Clifford Chance is an international law firm. We’ve got offices here in New York, also in D.C. Our main office is in London, and then we have offices throughout Europe and the Middle East. I think that the firm has realized what an incredible opportunity digital assets are, including securities tokens in particular, and that because you’re dealing in a digital medium that crosses borders all around the world that you need support all around the world as well in the form of legal advice and whatnot. My specific focus is on broker dealer and investment advisor regulatory issues. I also do a fair amount on alternative trading systems, exchanges, et cetera, and then also a little bit on the enforcement side dealing with primarily we’ll call them ICO issuers who took a chance, a big gamble and it hasn’t worked out particularly well for them. So I think that that’s what the Security Token Academy here really brings to the table is doing things in a regulatory compliant way.
I will, first of all, just thank you so much for inviting me to be here tonight, Amy, to be a part of this. This is spectacular space, and I’m really happy about the number of friends that I have in the room. My name is Robin Sosnow. I’m a Corporate and Securities lawyer here in New York City. I’ve had my practice for the last five years. We work with issuers, broker dealers, and funding portals in an effort to help them raise capital or deal with regulatory compliance issues. I’m really focused on the JOBS Act, so we do a tremendous amount of regulation crowdfunding work, Reg D 506(c) Reg A+. I’m also the author of the CrowdCrypto Newsletter, which goes out weekly. If you’re interested, let me know. I’ll sign you up. And I’m also, my firm is a joint venture partner in a law firm called Digital Securities Law Group that focuses on helping private companies tokenize ownership and sell it through private placements.
Hi everyone. My name is Jason Gottlieb. I’m a partner at Morrison Cohen, LLP, a mid-size law firm here in New York City. We are a full service law firm doing all sorts of things. My own practice focuses on regulatory enforcement and litigation issues. And these days, as many of you are aware, some of you perhaps more painfully than others, regulatory enforcement in the crypto space has been sort of a hot topic. So I typically handle SEC or CFTC subpoenas, document requests, and even litigations. I’m a lead counsel in one of the earliest actions the SEC brought against an ICO issuer. So if any of you are in trouble with the SEC, our conversations are privileged. No one else will know about it.
If you are in trouble, you might want to talk to him outside.
We don’t want to hear that conversation. Well, thank you everybody. Thank you so much for donating your time and your knowledge tonight. So let’s start off with this question. You know, back in 2017, 2018, there was a huge appetite for these so-called utility tokens that were not being treated as securities. And as the space has evolved, the appetite for that seems to have decreased. There’s this evolution towards now tokenizing equity as opposed to some sort of network utility token. Why has that been the trend, this tokenizing equity thing? And is there still even an appetite for utility tokens? Why don’t we start with Robin, and then we can all jump in.
Sure. So in my practice, we’ve certainly experienced that shift in interest. I think one rationale or argument would be that it’s a much safer route to take if you’re a non-blockchain business and you’re looking to raise capital, but you see the value proposition of digital assets securities, then pursuing a capital raise in reliance on a traditional exemption, like Reg D 506(c), or even Reg CF. It’s just a much more conservative approach to take while still bringing a blockchain element into your capital raising strategy.
Yeah, I mean, I’m happy to go. I think that the biggest thing that I see is that basically regulators started to take notice, and it’s not the wild, wild West anymore. And so I think it’s not a bad thing, while it’s in the short-term. Everybody panicked and there was this downturn in the crypto space. But I think what’s happening is the market’s maturing. People are taking a step back and figuring out, okay, how can we do this compliantly? And so people in this space as well as regulators and the larger players take the digital asset space seriously. And so people trying to figure that out and work with regulators, and the people are thinking of from a long-term approach and trying to achieve long-term success with short-term gains are taking that approach. And so some of that takes time, unfortunately, and it takes more time than people would like. But you can’t do it without getting some of the key stakeholders on board.
Yeah. And I always found the concept of the “pure utility token” to be interesting, because at the end of the day I think it was very difficult to distinguish utility token just from an investment. And you weren’t getting much utility from some of the tokens that were out there, and you were also not really getting any sort of equity position. So I think that people started to think about it a little bit and they were like, wait a minute, this is not really ... what are we actually getting here? And I think that the SEC is, as you noted, also started to take notice and started to say, well, we haven’t really seen a token out there that isn’t a security, because they all look like you’re building enterprises to us. So I think that it’s less that there aren’t utility tokens that people are still playing with. I mean, you have some no action letters that have come out that would seem to be really pure utility tokens. I think the question has been the narrative that has shifted. The SEC has spoken and people have started to kind of take notice of that and say, okay, well, we’re going to have to be in a little bit in a regulated space, which is what many people had been saying for a very long time, but I think sometimes got drowned out in some of the other noise.
Interestingly, for a litigator and regulatory enforcement perspective, I’m actually going to take a business case on this one. I think early on a lot of people didn’t quite know what to do with utility tokens. People would introduce them and say, well, okay, do we actually need this thing? It’s real estate on the blockchain. It’s coffee, but on the blockchain. It’s love, but on the blockchain. And people were struggling with what the business use case was, and some are very compelling, and some are not so much. But when you come at it from the other side, when you look at assets that may already exist and the securitization of those in a digital concept, it’s easier for conservative businesses who are trying to adapt to it to understand, oh, it’s a security, but it’s going to be in a slightly different form. And that may be easier to approach for institutional actors and other bigger businesses than coming at it with an entirely new approach to businesses that were already existing.
So let’s talk about regulatory strategy and that evolution then. You know, with ICO’s the predominant thought was a very tech one of we’ll ask for forgiveness later. Whereas for STOs, there’s so much hyper focus on legal compliance and regulatory compliance, that seems to be, mother may I, let’s ask for permission first. So what are you all seeing in terms of regulatory strategy for both issuers and STO infrastructure players, and is that too conservative?
So Facebook, their original slogan was move fast and break things. That’s an approach that, as an attorney and advising my clients, I can never support despite the fact that that approach breeds innovation. So I think we’re seeing this tension right now between the Silicon Valley model of move fast and break things and what the regulators want to see, which is compliance, disclosure, cooperation, more disclosure, and their involvement in the process.
Yeah. I just had this conversation yesterday with someone at SeedInvest. The SeedInvest motto is move fast and do things and do it right. Not break things. So we try to straddle and get the best of both worlds, but it’s not always possible.
I think we’re in a really interesting time now. We’ve come out of this sort of move fast and break things sort of mindset and we’re moving into a position where people are a little bit more cognizant of when they are in a gray space and when they are in a no fly zone whatsoever. And I think that the best advice I can give people in this current environment is get good advice. Whether it’s from me as an attorney, whether it’s from somebody else, you have to know how to maneuver within that gray zone, and you have to be working with somebody who understands the way a regulator thinks. It’s not always a law firm. It can be a platform provider. It can be somebody else, but you need good advice. It can be Security Token Academy here. The point is you need to have good advisors, and you need to think out your steps, plot it out, and yes, there may be a little bit of an upfront cost to that, but compared to at the back end and some of the clients that we’re dealing with on the enforcement side, trust me, it’s a great investment now. You don’t want to wait until later. You can probably speak to that.
I have a lot of clients who are asking for a lot of forgiveness. And if you think it’s an expensive to hire her now, just wait until you get my bills.
It’s true. On the forgiveness versus permission route, I’ve seen two different trends. The SEC is set up - its fin hub service - where you can basically call them, set up a conference call with some of their folks, go through your business model and if you have questions, if you have the hard questions you can sit in and ask them the hard questions. Sometimes I’ve had clients find that very useful. They get some pretty good guidance. Other times we’ve asked the hard questions and the staff says, “That’s a hard question. Well, we encourage you to follow all of the securities regulations.” Thank you. But that style of approach can be helpful, because if later there’s any doubt about whether you did something wrong, I think it sets up a good dialogue with the staff, because we say we came to you, we told you everything about it. You could’ve told us don’t do it then. You didn’t tell us no. You didn’t tell us yes. But you didn’t tell us no. And that does put you in a better position than move fast, break things, and get a visit from the SEC later.
Well, let me ask you, there have also been legal fights over jurisdiction. I think 2018 there were a lot of people who are like, okay, well, we’re going to be legally compliant in the U.S. We’re just not going to treat it as a security internationally or vice versa. There’s just been so many different things. In fact, I think right now there’s a class action case against Tezos and there is a whole jurisdictional fight there to say, hey actually securities laws actually apply to you even though you claim that you are this Swiss company. Do we have any comments on the jurisdictional fights?
I actually think just related to jurisdiction as an aside, as you see the opposite issue where people are going abroad because there’s such little progress being made in U.S. securities laws and at the SEC, and a lot of people are putting a lot of effort and time to try to get answers and push it forward. But what you’re starting to see is a lot of people going abroad to other jurisdictions trying to avoid U.S. regulations. And jurisdictional issue is complicated. It’s goes as nuanced as where are your servers, so if you can even use AWS. Are the servers based in the U.S.? Are they based in Dublin? Or where are those servers based? There’s lots, the jurisdictional issues is really complicated in terms of what it is. But the bottom line is what I think is happening, which is a good thing is that the SEC is starting to take notice that everybody’s going abroad and what we’ve been trying to hammer home to regulators that the U.S. is already behind in the market, and they’re only going to fall further behind if we don’t make progress and kind of gain some momentum and traction in terms of giving guidance so people can start to do this in a regulatory compliant way. And there’s a lot of people out there that are trying. They’re just kind of held back by some of the lack of guidance out there.
There was a comment to that effect this week at the Financial Services Committee meeting where all five commissioners appeared, and Crypto Mom, Commissioner Pierce, made the comment, again now, that she believes that a safe harbor needs to be created for this new industry. I think that’s incredibly interesting. And when asked, well, who, I think Patrick McHenry asked her, well, who’s going to write that law? Is that something that you’ve seen come through from Congress? And she said that she believed that the SEC has jurisdiction to create that on their own, which was then kind of laughed about between her and the chairman. So we are in a time of maybe just before the shift. I don’t know when that’ll happen.
You know, so it’s interesting, because we, Clifford Chance having offices where it does, we get a very interesting view into the mentalities of security token issuers, both inside and outside the United States. And I can second the concept and the idea that there are issuers who are thinking about coming into the United States who may be working with some of our other offices, quite frankly, but they’re very nervous about the U.S. regulatory situation. I think you see this an awful lot with institutional investors, and people who want institutions that want to get into because they don’t want to be left behind. So sometimes what ends up happening is they just, they go outside the United States to do it. I think the other piece to that is that blockchain is so complicated and the way and the consensus process and the way that everything works where the individual nodes even are. You mentioned the Tezos case or Tezos, say it right.
But the bottom line is the court in that case was actually considering the fact that there were more Ethereum nodes inside the United States than there were in other places as one of many, one of various different rationales for saying that in fact U.S. courts did have jurisdiction over it, and over the activity that was going on, which I personally found incredibly scary, because if you can say that then basically the SEC, U.S. courts, they have jurisdiction over the Ethereum blockchain, which is kind of insane to me. So I can’t believe that that’s the right answer, but it just gives you a sense for the regulatory and the jostling between regulators is going on right now. And so it makes it difficult for companies, like what you all either have or are looking into, to effectively navigate the environment and to do it in a way that complies with the law when you can barely know what the law is at some points.
I have a lot of thoughts on jurisdiction. I represented a Canadian ICO issuer in litigation against the SEC, and there was an issue of personal jurisdiction right from the beginning where we said they’re not here. They were only there, they never came to the United States. And courts look at a set of traditional factors. Okay, were you doing business here? Were you advertising here? Were you targeting your advertising here? Where are the web servers, as you said? Were you letting people from the United States purchase your coins? How hard were you really trying to keep them out? The court looked at all of these issues, and it could’ve gone better for my clients, but, so we moved on to the next phase of the case. But there are other issues as well, if I can get a little bit legal nerdy here for a second. Let’s distinguish between regulatory action from SEC or CFTC and the private litigation.
If you are a foreign country and you are selling your coins, whether they’re securities or not, if you sell a security from a foreigner to a foreigner in a foreign country, then under Morrison vs National Australia Bank Supreme Court decision, it should not have jurisdiction here, because the federal securities laws, for one, do not explicitly have an extraterritorial reach. And the presumption is if you don’t have a extraterritorial reach specifically written into the laws, they do not have that reach. So that should be okay for private litigation. On the SEC side, however, two weeks after the Morrison decision came out, Dodd-Frank was passed, and Dodd-Frank has a Section 939 P, I told you I was going to get nerdy on you, that the SEC contests restored its extraterritorial reach. Now, there’s some argument about that including, from me, but the one appellate court that’s dealt with it so far has agreed with the SEC. That case is currently on Cert Petition to the Supreme Court, and we’ll see what happens. But the SECs view, which has prevailed so far, is that it does indeed have the extraterritorial reach to go anywhere in the world.
As a practical matter, they’re not usually going to go into a French security that was sold in France on the French stock exchange. They’ll leave that alone. They’ll leave that to the French. But then we’ve got crypto, and we’ve got blockchains, and a blockchain transaction happens everywhere on the blockchain where there are nodes. So if any of those nodes are in the United States as we saw in the Tezos case, again, the SEC, I definitely know how that’s pronounced, is going to think that they’ve got jurisdiction.
Yeah, I mean, I think just the bottom line, before anybody can catch all that, is that it’s complicated. And so to tie it back to the last question, which is forgiveness or permission, it’s not necessarily one or the other. The bottom line is you just need to do your diligence, and whether it’s counsel or advisors who are experts in the space is you just need to do your diligence. And then at the end of the day, for myself, as in-house as an attorney, who basically my job is basically to present and educate the business folks on all the risks, and at the end of the day help to make a calculated business decision. Whether that’s asking for forgiveness or permission, and whichever approach you take, but the point is is that you do your diligence, and then make a decision versus asking for forgiveness doesn’t mean you just do it and worry about it later. It means you’ve done your diligence and this is the right business decision you’ve decided and poses the most acceptable amount of risk.
And just one last thing on these points. I don’t think any of us are saying that you should be passive in your business endeavors. Fate does favor the bold. I think at the end of the day, it’s just an issue of getting that advice so you know where is more safe to trod as opposed to less safe to trod, and you can make, like you were saying, an informed business decision. So it’s not to be passive. You still need to be aggressive in business in order to grow your business and to be effective. But at the same time you just need to know where the landmines are.
So we have time for only one more question. So what I’m going to ask is what are the greatest legal and regulatory challenges that exist today for STO issuers, and then STO infrastructure players?
Can I cheat and give you two answers?
I think in the short term, the biggest challenge is just getting some guidance so we could push forward and start to do these in a regulatory compliant fashion here in the U.S. The second biggest challenge is trying to fit a square peg into a round hole. And I think if you really want to do it right, which is some other jurisdictions that are being very thoughtful about it, is not trying to take existing securities laws and kind of fit digital assets into how traditional securities have been treated that are on paper, or even in digital form and not on the blockchain, and just tear it up and rewrite the rules for the 21st Century and for blockchain technology. I think you’ll see in a lot of the progressive jurisdictions like Malta and Bermuda and a lot of other jurisdictions out there, that’s the approach they’re taking. There are other jurisdictions out there that are just open doors, and anybody can come and do what they want. We don’t believe it’s the best long-term solution for the space to be taken seriously.
Yeah. I think the answer that goes to both of those is, again, regulatory certainty. We need to know what the products are. We need to know what we’re dealing with, and we need them to be clearly characterized by the SEC and by other regulators, quite frankly. I mean, it was, yes, it was hidden in a speech that happened some time ago, a couple years ago. It was helpful in the sense that it said, okay, well Bitcoin and Ethereum, in the SECs view at least - at least in their current iterations - although Ethereum could change, it could become more centralized, but we’ll leave that, we’ll table that argument for a second. But in their current decentralized fashion, are not securities. It would be a godsend if we could just get that guidance with respect to some other products as well, so that we at least knew what was not a security and what is a security. But once we can start getting some of that foundation laid and that certainty, it’s only going to help businesses grow. It’s only going to help people like folks who are out in the audience here tonight, and it’s only going to make everybody much more comfortable when they go to bed when they go to sleep at night, because you’re no longer having to exist in this purely gray area.
So within my practice, I’m going to answer a little bit differently. For my client base specifically, we’ve had a lot of achievements this year through service providers like Securitize, who’ve accomplished big capital raising rounds with institutional participation, registered transfer agent service for digital securities. These are tokenization of digital assets securities. Someone who’s a go-to that we can trust, that I can refer my clients to make their vision a reality. But the issue that my clients continue to face is that if they want to bring the retail investor into their deal, they’re limited to $1,070,000 per year under Reg CF. They’re not able to form an SPV to house those investors. And there’s a tremendous amount of disclosure that comes with it. So my response to your question is that we need a revitalization of the JOBS Act to make Reg CF, in particular, Reg A+, more accessible to a wider audience of potential users as soon as possible.
Custody. I think custody is the single biggest challenge that’s facing the industry from just a practical perspective. And I see a lot of developments in that area. People are building these new beautiful cathedrals for crypto custody, and it’s glorious to see, and it seems to me like a complete waste of a lot of effort. Not because of what they’re doing, but because if there were better guidance from the beginning, either this is how you do it, or you can’t do it, so never mind, it wouldn’t have been necessary to expend all of that. And I think that there’s a lot more work that’s going to have to go into that before SEC and FINRA are going to be satisfied that the custody obligations are met so that they can say they’re doing their investor protection. I mean, it’s fundamentally a really difficult problem when you have a new asset that is supposed to, by design, not be in any one person’s custody, and you can’t fit that square peg into the round hole of 15c3-3 where you’re saying it all has to be in one person’s custody for safe keeping.
Those two things are fundamentally irreconcilable. So when I hear people like Jay Clayton saying, well, just follow the securities laws, it’s a security, I have to say, but it’s not, and it doesn’t work. And for those areas, I think we need more. Either we need more guidance, or we’re going to have to have a blessing over the cathedrals that get built so that people at least know how they can do it in a way that’s compliant.
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