SEC Director of CorpFin Bill Hinman Provides Crowdfunding Update at Small Business Capital Formation Advisory Committee Meeting

Earlier this week, the inaugural meeting of the Small Business Capital Formation Advisory Committee (SBCFAC) took place at the Securities and Exchange Commission (SEC) in Washington, DC. The new Committee brings together a diverse group of small business proponents including several Fintechs. Led by Martha Miller, the Small Business Capital Formation Advocate at the SEC, the meeting saw the participation of SEC Director of Corporate Finance, Bill Hinman, provide an update on regulatory items of note for the online capital formation sector.

CorpFin has oversight over the existing securities exemptions including Reg D, Reg A+, and Reg CF – each exemption is utilized to raise capital online.

Hinman said the SEC will soon be reporting on both Reg A+ and Reg CF, both part of the JOBS Act of 2012, and how they have been used since they became actionable, perhaps providing valuable insight into progress of the exemptions.

Reg A+ allows an issuer to raise up to $50 million in an “IPO light” type offering requiring extensive offering documents while Reg CF allows an issuer to raise up to $1.07 million via online, FINRA regulated, “portals” or broker-dealers.

Hinman said both he and the SEC Chair, Jay Clayton, have been looking at improving access to capital beyond the coastal centers of innovation. Chair Clayton has consistently stated that access to capital was a top priority for his tenure at the Commission.

Hinman said the SEC was in the process of reviewing previous recommendations which were submitted by this Committee’s predecessor.

Speaking specifically about Reg CF, Hinman characterized the exemption as still small in contrast to other exemptions when considering amounts raised:

“We do think it is important and we want to make certain we optimize Reg CF.”

Hinman reported that the SEC has been receiving a lot of comments as to how the exemption can be improved.

“Right now we count about 1300 offerings done under the crowdfunding [Reg CF] regulation. Out of that 1300, a little less than half, about 520 or so, have actually raised the targeted amounts. And I think a total of about $110 million has been raised. So, relative to Reg D, or even Reg A, the amounts are modest, but the numbers are increasing and we hear a lot of interest when we go out and speak around the country. So this is something we will be keeping an eye on.”

Hinman said the SEC will be looking for the Committee’s recommendations when it comes to Reg CF. Hinman said there might be some things they can do to improve the exemption, such as raising the limits for the amount that can be raised as well as the amounts that investors can put in.

In months past, a group of Fintech leaders in the US petitioned Chair Clayton to raise the Reg CF limit to $20 million.

“We are interested in the Committee’s thoughts on crowdfunding…,” Hinman stated.

Hinman also addressed Regulation A (Reg A+), Title IV of the JOBS Act. This updated exemption was segregated into two tiers with tier 2 allowing an issuer to raise up to $50 million while being exempt from state review (blue sky). The SEC is due to report on the status of Reg A+ this year as well.

Hinman said they are going to be looking at the size of raises under tier 2 of Reg A+ perhaps intimating an inclination to push the cap higher. There have been previous discussions, and proposed legislation, to mandate an increase for Reg A+, thus making it more palatable for larger issuers.

Tier 2 has gotten a lot of activity, according to Hinman. In part because of lack of state review (tier 1 must be state reviewed) – a costly and time-consuming task for an issuer and the reason old Reg A was never utilized.

“We see a lot of folks doing tier 2 offerings at amounts that could have been raised under tier 1. So they are willing to go a little bit further in the disclosure and live with tier 2 standards to afford themselves the preemption protections.”

Since Reg A+ came into existence, Hinman reports that 360 offerings have been submitted under tier 2. About 277 have actually been qualified by the SEC Staff and 132 of these offerings have actually raised proceeds.

“There is a bit of delay from when folks get qualified as to when the deal gets done.”

The total amount raised under tier 2 has been $1.4 billion, according to Hinman, an average per deal of about $10.6 million.

“Again, we are looking at the size limits there,” said Hinman. “And other ways that may be improved.”

Hinman said the Committee’s input will be very valuable.

“We are looking as to how we can harmonize our private placement exemptions,” Hinman explained. “We are thinking about doing a concept release on the harmonization of our various private placement exemptions. There is a whole network of exemptions, some would call it a patchwork, that have grown over time, some by statute … Reg D being the larger and most often used.”

Hinman posed the rhetorical question as to can the SEC do things to make this patchwork of exemptions fit better together and better serve a company’s lifecycle.

He touched upon the current definition of an accredited investor, a rule that excludes most of the population from participating in the majority of exempt offerings – something many people view as a regulatory disenfranchisement.

“Right now we see a very binary system in terms of accredited investors. Generally, if you are an accredited investor you can invest unlimited amounts – if not [accredited], you cannot invest a penny.”

Hinman said they want to examine if this is the “right approach.” Perhaps there are opportunities to scale access across all exemptions.

The discussion regarding the definition of an accredited investor was described as a forthcoming, significant release, from the SEC.

Many crowdfunding industry participants believe that Reg CF is mortally wounded in its present iteration, exemplified by the lack of utilization and its many obvious flaws. Any change to the definition of an accredited investor could go far in fixing the overall shortcomings of online capital formation.

Most other international jurisdictions do not offer a “patchwork” of exemptions. Typically there is only one with some segmentation between investor sophistication.

Depending on what the SEC finally produces in its harmonization project, the Commission has a unique opportunity to improve access to capital, as well as access to investment opportunity, for the entire country. While no timing on the pending concept releases was provided, one would assume the reports will surface in the coming months.

Small Business Advocate Martha Miller said they hear a lot of questions about progress at the SEC pertaining to access to capital. She said they ask “where is it?” She said here it is … referencing Hinman’s comments and the forthcoming concept releases.

Long Anticipated, SEC Issues Framework & Guidance for Digital Assets

The Securities and Exchange Commission (SEC) has published a statement on the “Framework for ‘Investment Contract’ Analysis of Digital Assets”

The public statement announcing the Framework was co-signed by Bill Hinman, Director of Division of Corporation Finance and Valerie Szczepanik, Senior Advisor for Digital Assets and Innovation.

The clarity in the regulatory approach regarding blockchain technology and digital assets has long been messaged by the Commission. While the statement represents SEC Staff views and is not viewed as a set in stone rule, regulation, or statement of the Commission, the publication should be positively received by this fast emerging sector of Fintech.

Largely based on the Howey Test, the guidance provides insight as to when a cryptocurrency may be traded and perhaps not be deemed a regulated security.

The statement concludes:

“[this] identifies some of the factors to be considered in determining whether and when a digital asset may no longer be a security. These factors are not intended to be exhaustive in evaluating whether a digital asset is an investment contract or any other type of security, and no single factor is determinative; rather, we are providing them to assist those engaging in the offer, sale, or distribution of a digital asset, and their counsel, as they consider these issues.”

The framework is being published in coordination with a No-Action letter by the SEC regarding the issuance of digital tokens for TurnKey Jet – a company that requested the Commission deem its TKJ token not be viewed as a security.

Crowdfund Insider Contributor and Security Attorney Anthony Zeoli provided a comment on the new Digital Asset Framework:

“It is great to see the SEC taking affirmative actions to help define what tokens/cryptocurrencies will be treated as securities. In order for this industry to reach its full capabilities the players need to know the rules and this new guidance goes a long way towards defining those rules.”

The framework and public statement from CorpFin are displayed below.

April 3, 2019

Blockchain and distributed ledger technology can catalyze a wide range of innovation.  We have seen these technologies used to create financial instruments, sometimes in the form of tokens or coins that can provide investment opportunities like those offered through more traditional forms of securities.  Depending on the nature of the digital asset, including what rights it purports to convey and how it is offered and sold, it may fall within the definition of a security under the U.S. federal securities laws.

As part of a continuing effort to assist those seeking to comply with the U.S. federal securities laws, FinHub is publishing a framework for analyzing whether a digital asset is offered and sold as an investment contract, and, therefore, is a security.  The framework is not intended to be an exhaustive overview of the law, but rather, an analytical tool to help market participants assess whether the federal securities laws apply to the offer, sale, or resale of a particular digital asset.  Also, the Division of Corporation Finance is issuing a response to a no-action request, indicating that the Division will not recommend enforcement action to the Commission if the digital asset described in the request is offered or sold without registration under the U.S. federal securities laws.

As financial technologies, methods of capital formation, and market structures continue to evolve, market participants should be aware that they may be conducting activities that fall within our jurisdiction.  For example, market participants may engage in activities that require registration of transactions and persons or entities involved in those transactions.  Even if no registration is required, activities involving digital assets that are securities may still be subject to the Commission’s regulation and oversight.  More specifically, the information contained in this framework may apply to entities conducting the following activities related to digital assets:

  • offering, selling, or distributing
  • marketing or promoting
  • buying, selling, or trading
  • facilitating exchanges
  • holding or storing
  • offering financial services such as management or advice
  • other professional services

This framework represents Staff views and is not a rule, regulation, or statement of the Commission.  The Commission has neither approved nor disapproved its content.  This framework, like other Staff guidance, is not binding on the Divisions or the Commission.  It does not constitute legal advice, for which you should consult with your own attorney.  It does not modify or replace any existing applicable laws, regulations, or rules.  Market participants are encouraged to review all the materials published on FinHub.

The Staff recognizes that determining whether a new type of financial instrument, including a digital asset, is a security can require a careful analysis of the nature of the instrument and how it is offered and sold.  If after applying the framework, market participants have questions regarding whether a particular digital asset is a security, they are encouraged to reach out to the Staff through FinHub’s web form.

[pdf-embedder url=”” title=”SEC dlt-framework April 3″]

SEC Director of Corporation Finance Says More Enforcement Actions Coming for Initial Coin Offerings

Speaking at the annual SEC Forum on Small Business Capital Formation, William Hinman, Director of Division of Corporation Finance at the SEC, said there are more enforcement actions coming when it comes to Initial Coin Offerings (ICO). Hinman, a former Silicon Valley based corporate attorney, did not mince words stating issuers should be “thoughtful” in launching an ICO. His statement should come as no surprise as the SEC has been heavily messaging their intent to go after ICO issuers who do not file for an appropriate exemption. While some ICOs may receive a pass before the SEC filed the DAO report this past summer, anyone who issued an ICO following that event without an exemption is fair game and may find themselves under the scrutiny of the SEC Enforcement Division.

Most legitimate ICOs that are seeking US money are currently submitting either a Reg D, Reg A+ or Reg CF filing with the SEC. Other ICOs appear to be denying access to US based investors. SEC Chair Jay Clayton commented recently, “I have yet to see an ICO that doesn’t have a sufficient number of hallmarks of a security,” delivered in the middle of a speech at the Institute on Securities Regulation in Manhattan.

Hinman added that additional reports on ICO are forthcoming – perhaps creating a bright line definition of when an ICO is a security and when it may be considered a Utility Token.

SEC’s Division of Corporate Finance & Enforcement Issue Joint Statement on ICO Report

The SEC Division of Corporate Finance and Enforcement have jointly published a public statement regarding the DAO investigation and the ensuing report and cautionary statement on ICOs. The two powerful branches of the SEC came together in recognition of the changing world of finance as Fintech innovation takes hold and regulators and policy makers struggle to keep pace. The ICO market has boomed during the first half of 2017 as the completely unregulated market took advantage of blockchain technology and the concept of raising funds by issuing bespoke digital tokens. Now the pendulum has swung in the opposition direction as the Feds sent shots across the bow of cryptocurrency entrepreneurs establishing the fact that Initial Coin Offerings, are in fact regulated securities.

The statement by CorpFin and Enforcement (the largest division of the SEC), is reproduced below.

Emerging Technologies and the Federal Securities Laws

Distributed ledger and other emerging technologies have the potential to influence and improve the capital markets and the financial services industry.  Interest in and funding for these technologies appears to be growing at a rapid pace.  We welcome and encourage the appropriate use of technology to facilitate capital formation and provide investors with new investment opportunities. We are particularly hopeful that innovation in this area will facilitate fair and efficient capital raisings for small businesses. We are also mindful of our obligation to protect investors and recognize that new technologies can offer opportunities for misconduct and abuse.

A fundamental tenet of our regulatory framework is that an offer or sale of securities in the United States must comply with the federal securities laws. This approach has been critical to maintaining market integrity and fostering investor protection for over 80 years, including through various changes in technology. In this regard, the issue of whether a particular investment opportunity involves the offer or sale of a security — regardless of the terminology or technology used in the transaction — depends on the facts and circumstances, including the economic realities and structure of the enterprise.

Report of Investigation — DAO Tokens are Securities

Today, the Commission issued a Report of Investigation (“Report”) relating to an offering by The DAO — a decentralized autonomous organization that used distributed ledger or blockchain technology to operate as a “virtual” entity. The DAO sold tokens representing interests in its enterprise to investors in exchange for payment with virtual currency. Investors could hold these tokens as an investment with certain voting and ownership rights or could sell them on web-based secondary market platforms. Based on the facts and circumstances of this offering, the Commission, as explained in the Report, determined that the DAO tokens are securities.

Sponsors involved in an exchange of something of value for an interest in a digital or other novel form for storing value should carefully consider whether they are creating an investment arrangement that constitutes a security. The definition of a security under the federal securities laws is broad, covering traditional notions of a security, such as a stock or bond, as well as novel products or instruments where value may be represented and transferred in digital form. A hallmark of a security is an investment of money or value in a business or operation where the investor has a reasonable expectation of profits based on the efforts of others.

A market participant engaged in offering an investment opportunity that constitutes a security must either register the offer and sale of the security with the Commission or structure it so that it qualifies for an exemption from registration. Market participants in this area must also consider other aspects of the securities laws, such as whether a platform facilitating transactions in its securities is operating as an exchange, whether the entity offering and selling the security could be an investment company, and whether anyone providing advice about an investment in the security could be an investment adviser. Structuring an offering so that it involves digital instruments of value or operates using a distributed ledger or blockchain does not remove that activity from the requirements of the federal securities laws.

Consultation with Securities Counsel and the Staff

Although some of the detailed aspects of the federal securities laws and regulations embody more traditional forms of offerings or corporate organizations, these laws have a principles-based framework that can readily adapt to new types of technologies for creating and distributing securities. We encourage market participants who are employing new technologies to form investment vehicles or distribute investment opportunities to consult with securities counsel to aid in their analysis of these issues and to contact our staff, as needed, for assistance in analyzing the application of the federal securities laws.

In particular, staff providing assistance on these matters can be reached at .

Investors Should Be Mindful of Risks Associated with New Technologies, Including Risks of Fraud

Finally, we recognize that new technologies also present new opportunities for bad actors to engage in fraudulent schemes, including old schemes under new names and using new terminology. We urge the investing public to be mindful of traditional “red flags” when making any investment decision, including: deals that sound too good to be true; promises of high returns with little or no risk; high-pressure sales tactics; and working with unregistered or unlicensed sellers. In that regard, the SEC’s website for individual investors,, has a number of relevant resources — including an Investor Bulletin that the SEC’s Office of Investor Education and Advocacy issued today regarding Initial Coin Offerings.

SEC Will Allow All Companies to Submit Draft Registration Statements on a Non Public Basis

The Securities and Exchange Commission, (SEC) has announced that the Division of Corporation Finance (CorpFin) will now permit all companies to submit draft registration statements relating to initial public offerings for review on a non-public basis.

This process will be available for IPOs as well as most offerings made in the first year after a company has entered the public reporting system. CorpFin said this change will take effect on July 10, 2017.

Bill Hinman, Director of the Division of Corporate Finance, stated;

“This is an important step in our efforts to foster capital formation, provide investment opportunities, and protect investors. This process makes it easier for more companies to enter and participate in our public company disclosure-based system.”

The SEC said that permitting all companies to submit registration statements for non-public review, similar to the benefit used by emerging growth companies (EGC) under the JOBS Act, will provide companies with more flexibility to plan their offering.

The non-public review process after the IPO reduces the potential for lengthy exposure to market fluctuations that can adversely affect the offering process and harm existing public shareholders. By requiring a public filing period prior to the launch of marketing, the process incorporates a feature of the EGC review process that provides an opportunity for the public to evaluate those offerings.

“By expanding a popular JOBS Act benefit to all companies, we hope that the next American success story will look to our public markets when they need access to affordable capital,” said Chairman Jay Clayton. “We are striving for efficiency in our processes to encourage more companies to consider going public, which can result in more choices for investors, job creation, and a stronger U.S. economy.”

The SEC maintains certain statutory authority to alter certain rules. There is hope within the crowdfunding sector the Commission will use this authority to improve on certain aspects of investment crowdfunding.