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Turf War Taking Place Between Regulators

Expert Interview


 
Marty Tate: Turf War Taking Place Between Regulators

Marty Tate

Marty is a nationally recognized securities, finance and fintech attorney and counsels clients throughout the U.S. and internationally on various forms of structured finance, private and public securities offerings, fintech, initial coin offerings and tokens sales, SEC reporting, real estate financings, venture capital and angel financings, fund formation and compliance, business formation and corporate governance..

Since 2009, Marty has been active in advising clients in the crowdfunding and peer-to-peer lending space, with a particular focus on the JOBS Act, Regulation D offerings, intrastate offerings and Regulation A. His clients in this space include nationally and internationally recognized platform operators, sponsors, issuers, investors and service providers. He was recently recognized as one of the top crowdfunding attorneys and continues to provide expertise and play a leading role locally and nationally in this evolving area of securities law.

Prior to joining CLI, Marty served as General Counsel and Director for Harbor Capital Partners, a private investment company. He also served as in-house counsel for other funds and investment groups and continues to focus a large part of his practice on issues surrounding private funds. His clients in this area include hedge funds, private equity funds, venture capital funds where he provides counsel relating to fund formation and structuring, regulatory compliance, investment structuring and reporting issues. He has assisted in the formation of numerous domestic and offshore funds in various structures and has advised investment managers and investment advisors on state and SEC compliance issues associated with the management of such funds.

Marty also represents a number of entrepreneurs, small and large companies as well as private investors, finance companies, national and regional banks, investment banks and venture capital and private equity firms. In working with such clients, he regularly advises on various transactions, financings, contracts and agreements in an array of matters. Throughout his career, he has provided counsel in association with over $500 million in debt and equity financings.

Transcript


 

Amy Wan:

Hi, this is Amy Wan. I'm at the StartEngine Summit in LA and I'm here with Marty Tate. Hi Marty.

Marty Tate:

Hey Amy. Hey, how you doing?

Amy Wan:

So you are an attorney. What firm are you at?

Marty Tate:

So I'm with Carman Tate Lehnhof Israelsen. We're a boutique securities finance firm based in Salt Lake City. We have offices in Palo Alto and Portland, Oregon as well.

Amy Wan:

Fantastic. So the SEC and the CFTC have kind of ... In some ways they're almost going a little bit head to head. Each are coming out with their own clarification and guidance. Can you give us an up to date primer on the CFTC's position on security tokens or the token industry in general?

Marty Tate:

Yeah. So the CFTC's been pretty consistent and I think there's a little bit of a turf war that's happened between regulators. You see, not only the SEC but the IRS has a position. As well as the CFTC which ... And they've been pretty constant. I think since 2015 they've said virtual currencies constitute a commodity. That position's been reiterated multiple times over the past few years and then there's been a recent court case within the last month where district court basically confirmed that ruling that virtual currencies or digital assets are commodities for CFTC purposes.

Now when that happened, I had a lot of clients call me and say, "What does this mean? How does this affect us?" It doesn't ... And my first reaction was, "Well I'm not sure. Let's figure that out." Because it depends on what they're doing but the CFTC really only cares, that really only matters, in that [inaudible 00:02:01], only really matters if you're engaging in some sort of derivative contract, a future contract. It doesn't relate to spot sales. So which is what's happening on most exchanges.

So from that aspect, you don't need to go out and worry that you're complying with the commodities rules. The other spot where it does come into effect, and this is where we've seen action by the CFTC, is if there's been fraud. And in a number of cases in some of these lawsuits that we've seen or enforcement actions, there's been fraud by the issuer and the CFTC says in those cases, we'll come in and we can bring an action. I think that that, again there's a little bit of a turf war. I don't know how much the SEC really cares about that. I'm sure they're happy to have the help. And from the ... You put that next to, juxtapose that with what Commissioner Clayton has said which is, "I have yet to see an ICO that's not a security." And we've had clients say, "Well is it a security? Is it a commodity? Is it a currency?" And the fact is it could be all of those things, or none.

Amy Wan:

And so it's not mutually exclusive, right?

Marty Tate:

Correct, yeah. You could have an offering that's done, an issuance, a token sale, and that could start off as a sale of a security. The CFTC could say, "Hey, there's fraud. We think it's a commodity. We're going to investigate." And in New York they might say, "Hey, that's a currency and you need a BitLicense." So yeah, it's clear as mud.

Amy Wan:

I mean this is all very much regulatory soup and I think for smaller companies, privately held companies, startups, it can be very confusing but also become very costly to figure out, how do I comply with all these regulations? When do I know if I'm a commodity, a security, if all these different regulators apply? What gives?

Marty Tate:

That is a great question, Amy. What does give? And we get this a lot. I have a client that's doing an offering now and they ... You know we went through this analysis and for all intents and purposes, their token, it functions like a currency. It has value within their ecosystem. You can buy products, it's used to basically engage in commerce on their platform. Looks like a currency. The sale of that though could be deemed as a sale of a security. And as you can imagine that not only creates confusion but it creates a lot of frustration. Because, "Well what laws do we have to comply with?" And even if it was a currency then we have to say, "Okay, well where can you sell a currency and what do you need to sell a currency? And what licenses?"

So it is. It's insanely unclear.

Amy Wan:

So let's switch gears for a second -

Marty Tate:

Yes.

Amy Wan:

... and talk Reg A+ Plus', right?

Marty Tate:

Okay.

Amy Wan:

There are a stack of STO related Reg A+ Pluses on the SEC's table but none have been qualified. Why and how long is it going to take for the first one to get qualified?

Marty Tate:

I don't know. I have a few of those in the stack and I would love for those to get through. One of the offerings that we have is almost identical to a regular, preferred, stock offering that we did for REIT. The only thing that's really different is that instead of the preferred stock being Series B it's Series T for tokens and the company plans on tokenizing it. And you would think that would be something they just look at and say, "Great. We already -

Amy Wan:

That's an easy one, yeah.

Marty Tate:

Yeah. "We've approved this format. We know you guys, all the players are the same." But it's sitting on their desk. We heard earlier today, former Commissioner Cox said that, I guess he's got one on the SEC's table as well and he says it's been in there for almost a year. The better part of 2018. And he says, "We've answered all the questions, we've done everything right and they're just afraid to approve it."

I think once they do, you would think those sort of flood gates would open. I think they're just afraid to -

Amy Wan:

Open the flood gates.

Marty Tate:

... open the floodgates, yeah. But I think that they'll have to at some point. And once they do I think that will be a big change in the industry. I think you'll see, in addition to these stacks that are on their table you'll see a lot more filed because of sort of the promise of what a tokenized equity could bring as far as liquidity.

Amy Wan:

So we are nearing now the end of 2018. So how do you think the space is gonna evolve next year in 2019 and do you have a wish for the industry in 2019?

Marty Tate:

So I would wish that there would be a little more guidance. I think the SEC continued just to kick the can down the road. They're trying to say, "Hey let's apply this 100 Euro rule of the Howey Law or the Howey Test. Let's apply current securities laws. We have a 1933 Act and a '34 Act. It would be great to have a 2019 Act. We're not going to see that, but, you know. That's my wish list, I guess.

I think the market will evolve in that ... Like I said, I think that dam will break. The SEC will start approving some of the tokenized Reg A+ Plus offerings and once that happens I think that that will become almost more of ... I don't want to say the norm. It will take ... There'll be an adoption period. But once you actually see tokenized offerings being approved, you see secondary trading and that's kind of the big elephant, I guess, that's eluding us, right? Is that secondary trading. As soon as those ATSs, or those ... Your T0s or whoever, get approved, once those things start falling in place ... And I was saying last year that it would be 2018 so fingers crossed 2019. I think we'll just see tremendous growth in the industry. You're already seeing a lot of private placements of tokenized offerings. You're seeing the tokenization of real assets, of real estate, of oil, of a lot ... I'm working on a solar deal. So you're seeing that movement and I think that will only grow once those floodgates open.

Amy Wan:

Fantastic. Thank you so much for joining us Marty.

Marty Tate:

Yeah, you're welcome.

Amy Wan:

This is Amy Wan from the StartEngine Summit in LA.