SEC – Page 2 – FinTech and Blockchain Law Watch

Conference Report – Blockchain and the Law: Towards a Responsible Blockchain Sector

Jun 22 2018

By Anthony R. G. Nolan and Julien E. F. Barbey

On June 14, Cardozo Law School in New York City held a conference entitled “Blockchain and the Law: Towards a Responsible Blockchain Sector.” The conference was led by a panel consisting of current and former commissioners and staff members of the SEC and the CFTC including Rob Cohen, director of the SEC’s enforcement division.

Among topics discussed was SEC Director William Hinman’s recent speech in which he stated that Ethereum is not a security. Panelists suggested this may indicate that the SEC would regard a token as being able to change its character over time, such that a token that was once a security can morph into one that is not a security. This would have important implications for market practices, potentially including the utility of SAFTs.

SEC Cautions “Utility Token” Sponsors and ICO Market Intermediaries

Dec 14 2017

By Robert M. Crea

On December 11, 2017, the SEC released a cease-and-desist order against a purported “utility token” sold by Munchee Inc. (“Munchee”) and a statement by Jay Clayton on Cryptocurrencies and Initial Coin Offerings. Two takeaways:

The SEC will scrutinize so-called “utility tokens” under the Howey test, and Chairman Clayton believes that most token sales he’s seen constitute securities offerings. The familiarity of the Munchee utility framework to other token offerings coupled with Chairman Clayton’s Statement could very well chill the market for utility tokens seeking to avoid application of federal securities laws.
The SEC expects intermediaries operating in crypto, specifically law firms, accountants, consultants and broker-dealers, to be “gatekeepers” of investor protection.

We will be providing a fuller analysis in the next several days.

New SEC Cyber Unit Obtains Emergency Action Against ICO

Dec 07 2017

By Robert M. Crea and Evan J. Glover

On December 4, 2017, the Securities and Exchange Commission’s (“SEC”) new Cyber Unit obtained an emergency asset freeze to halt a Canadian initial coin offering (“ICO”) called PlexCoin that had raised up to $15 million from thousands of investors. The SEC filed its complaint (“Complaint”) in the Eastern District of New York, alleging that the sponsor and his company, PlexCorps, marketed and sold securities to investors in the U.S. and elsewhere under a variety of false pretenses, including that PlexCoin would yield a 1,354% profit in less than 29 days. The complaint seeks permanent injunctions, disgorgement plus interest and penalties.

Initial Coin Offerings “Horrify” a Former SEC Commissioner

Nov 30 2017

By Robert Crea

On Sunday, November 26, 2017, the New York Times published an interview with Joseph Grundfest, former SEC Commissioner and current Stanford law professor. Professor Grundfest is sharply critical of the posture of initial coin offerings under U.S. federal securities laws. Given his persuasive voice on securities law matters and his influence in Silicon Valley, this interview may very well serve as a sobering wakeup call to the ICO marketplace.

Some notable quotes:

“ICOs represent the most pervasive, open and notorious violation of federal securities laws since the Code of Hammurabi. . . .It’s more than the extent of the violation . . . . It’s the almost comedic quality of the violation.”
“These are not hard cases . . . . You don’t need teams of accountants poring over complex financing documents [to bring enforcement actions].”
“We’re waiting to see a whole bunch of enforcement actions in this space, and we wonder why they haven’t happened yet. . . .I hope what [the SEC is] doing is planning on a sweep of 50 ICOs.”

The article may be found here.

U.S. SEC issues report on digital currencies and related autonomous organizations

Jul 31 2017

By C. Todd Gibson and Evan Glover

On July 25th the United States Securities and Exchange Commission (“SEC”) released a report to put the market on notice that offers and sales of digital assets are subject to the requirements of the federal securities laws.

The report is a result of an investigation of a German created entity called The DAO (Decentralized Autonomous Organization), which is a virtual organization that exists within computer code and is executed on a blockchain or decentralized ledger. The DAO sold DAO Tokens, which had characteristics similar to stock (e.g. certain ownership and voting rights), with the intent to raise funds to finance various projects. The DAO Tokens were purchased using a digital currency and could be monetized by re-selling the token on a web-based platform that supported a secondary market. The DAO engaged in these offers and sales in the U.S. despite not registering with the SEC.

RegTech: A U.S. regulator’s view on artificial intelligence in risk assessment

Jun 29 2017

By C. Todd Gibson and Evan Glover

On 21 June at the OpRisk North America 2017 conference in New York, Scott W. Bauguess, Acting Director and Acting Chief Economist of the U.S. Securities and Exchange Commission’s (“SEC”) Division of Economic and Risk Analysis (“DERA”) gave a keynote speech on the use of artificial intelligence by regulators. A transcript of the speech can be found here. Bauguess provided some interesting background on the utility and use of big data and machine learning at the SEC to identify potential misconduct by market participants and investment managers, and the emerging use of artificial intelligence.

Bauguess’ speech discussed the SEC’s use of AI in its regulatory framework, initially discussing machine learning. The SEC currently applies topic modeling methods, such as Latent Dilchlet Allocation (“LDA”). LDA reviews text-based documents (e.g., registration disclosures) and reports on where, and to what extent, particular words appear in each document. This occurs either by: analyzing the probability of words across documents, and within documents, to define the topics they represent (“unsupervised learning”); or incorporating human judgement and direction into the programming of the machine’s algorithms (“supervised learning”).

SEC guidance on roboadvice

Mar 02 2017

By C. Todd Gibson and Michael W. McGrath

The US Securities and Exchange Commission’s staff has published information and guidance for investors and the financial services industry on the fast-growing use of “robo-advisers,” a catch-all term for investment advisers that use computer algorithms to provide investment advisory services online, often with limited human interaction. In light of the unique issues raised by robo-advisers, the SEC’s Division of Investment Management issued a Guidance Update on 23 February 2017 for investment advisers with suggestions on how robo-advisers can best comply with disclosure, suitability and compliance obligations imposed by the Investment Advisers Act of 1940. A second publication, an Investor Bulletin issued by the SEC’s Office of Investor Education and Advocacy, provides individual investors with information they may need to make informed decisions if they consider using robo-advisers.

SEC FinTech Forum Part 2: Don’t Call Me a Robo Adviser

Dec 21 2016

By Brian Vargo and Tyler Kirk

As we reported in Part 1 of this series of posts, the U.S. Securities and Exchange Commission held its first forum exclusively focused on the impact of the FinTech movement on November 14, 2016. The first panel of the forum addressed recent innovations in investment advisory services. The panel was comprised of Ben Alden, General Counsel of Betterment, Bo Lu, Co-Founder and CEO of Future Advisor at Blackrock, Mark Goines, Vice Chairman of Personal Capital, and Jim Allen, Head of Capital Markets Policy Group, CFA Institute. While several of the panelists lamented the use of the title “Robo Adviser,” the panel’s discussion was vibrant and delved deeply into the role robo advisers (advisers which rely to varying degrees on computer-based technology, primarily algorithms, to deliver investment advice) are and should be playing in the United States.

First, the panel discussed the growth in automated advice, attributing the growth to the ability of lower net worth investors, especially those comfortable with technology, to obtain affordable and sophisticated investment advice. Given the savings shortfall in the United States, this growth was viewed to be a positive trend. Further, the panel also noted that the DOL Fiduciary Rule is also driving growth. Ultimately, the panelists thought that the industry would consolidate as assets under management grew.

SEC FinTech Forum Part 1

Nov 22 2016

By Brian Vargo and Tyler Kirk

On November 14, 2016, the U.S. Securities and Exchange Commission held its first forum exclusively focused on the impact of the FinTech movement on the capital markets. Specifically, the forum was organized into four panels addressing automated investment advice, blockchain and distributed ledger technology, crowd funding and marketplace lending, and investor protection. Over the coming weeks we will be posting the key takeaways and implications of each panel.

In her opening remarks, Chair White called for federal agencies to encourage innovation while balancing such encouragement with appropriate investor protections. She noted that the speed and impact of FinTech innovation increases the need for reviewing the sufficiency of regulation. In that spirit, Chair White asked the SEC staff to form a FinTech Working Group to help foster responsible innovation in the capital markets, while exploring the adequacy of the current regulatory framework to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Commissioner Piwowar said in his remarks that the SEC is uniquely positioned to take the lead regulatory role in the FinTech movement, because many FinTech companies are already registrants and, significantly, the SEC is the only federal agency whose mission includes capital formation. The remarks at the forum indicate that the SEC and industry expect FinTech to play an increasingly important role in the securities industry and that the SEC should continue to engage with industry members in developing regulations that are thorough and forward-looking.

SEC provides U.S. crowdfunding guidance to investors

May 03 2016

By C. Todd Gibson, Michael McGrath, Ken Juster

The SEC recently issued guidance to potential investors in crowdfunding offerings in the form of a Q&A posted on the SEC website, which can be found here. This guidance, which is intended to educate investors regarding the rules governing crowdfunding in the U.S., was issued in anticipation of the pending effectiveness of new Regulation Crowdfunding on May 16, 2016. K&L Gates has prepared a detailed summary of Regulation Crowdfunding and the exemption from broker-dealer registration available to intermediaries known as “funding portals,” which can be found here.

Intermediaries were first able to submit forms to register as a funding portal with the SEC and FINRA beginning on January 29, 2016. A list of approved funding portals is expected to be available on FINRA’s public website in the near future.

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