SEC Chairman Jay Clayton: Main Street investors should be able to invest in the private market on terms similar to those available to institutional investors

Securities and Exchange Commission (SEC) Chairman Jay Clayton has re-affirmed his belief that retail investors should have a compliant path to access more private securities offerings.

While initial public offerings (IPOs) have morphed into an exit opportunity for big money where retail investors end up holding the bag, and most wealth is captured in private securities offerings, Chair Clayton is looking to right this societal wrong that disenfranchises much of the population.

In opening remarks at the SEC’s Investor Advisory Committee meeting, Clayton said:

“I believe it is our obligation to explore whether we can reduce cost and complexity, and increase opportunity for our Main Street investors in this important market, including through professionally managed funds, where Main Street investors are able to invest in the private market on terms similar to those available to institutional investors. Importantly, we must ensure appropriate investor protections for our long-term Main Street investors.”

This is not the first time Clayton has expressed his opinion on leveling the playing field when it comes to investment opportunity. For some months now, Clayton has messaged his ambition to create a regulated path for retail investors to gain access to promising early-stage firms that frequently raise growth capital under Reg D – currently the realm of VCs and the very wealthy.

In the past, Clayton has also expressed his goal of addressing the definition of an Accredited Investor, which is fundamentally flawed. The current definition is widely understood as a poor metric for financial acumen and sophistication.

Clayton’s comments come at a time during a regulatory review on exemption harmonization as encapsulated in a “Concept Release.” The consultation recently closed comments from interested parties in September.

SEC Chair Jay Clayton Comments on the Change in Public Capital Markets: A Lot of Growth is Happening in Our Private Markets

Today, Securities and Exchange Commission (SEC) Chairman Jay Clayton was interviewed by Andrew Ross Sorkin during the annual Delivering Alpha event produced by CNBC. During the interview, Chair Clayton took the opportunity to address the shifting landscape of the private markets in comparison to public markets in the US.

As Crowdfund Insider has written in the past, today the private capital markets are far larger than its public brethren. This was not always the case. But as the cost to go public and to remain a “reporting” company has risen, more and more promising companies are trying hard to remain private as long as possible. Simultaneously, big money has quickly learned that much of the wealth created by younger firms is taking place while companies are private. While this is not necessarily a bad thing it does cut out the public markets and smaller investors who are currently blocked from accessing most of the private securities offerings.

Clayton said, “a lot of growth is happening in our private markets.” Are they as rigorous as the public markets? Of course not, acknowledged Chair Clayton, but a good number of participants are delivering “outsized returns” by investing in the private markets.

Asked about allowing “public investors” more access to private markets, Clayton had this to say:

“This is an issue,” said Clayton. “If the growth opportunity has shifted, not all the way, but to a substantial extent into our private markets and ordinary investors do not have access to them, that’s not good.”

So what do we do about it?

“One of the things I like in the public markets, [is that] mainstreet investors invest right alongside institutions with the same deal. Virtually the same drag… they are all in it together,” said Clayton. “Can we replicate that in our private markets? Now it is very difficult to do that on an individual basis. It’s hard to give individuals direct access to our private markets. So one of the questions is can we have some kind of fund structure where we ensure that ordinary investors are getting the same deal as institutional investors.”

Clayton added that he is concerned that public markets are being used more for liquidity than for growth (IE an exit as opposed to an entry point).

“We are having this debate,” said Clayton, a reference to the SEC concept release regarding regulatory harmonization.

Current chatter regarding the SEC concept release (akin to a consultation) is the SEC will move on two issues. The definition of an accredited investor and providing a sophistication qualification, and the creation of private market funds accessible to retail investors. If these two changes do, in fact, take place, this will be a big win for smaller investors. This will also represent a solid victory for Chair Clayton and a lasting stamp on the US capital markets which may have a positive impact for smaller investors for decades to come.

The video is embedded below.

Clayton: Individuals, institutions play by the same rules in public markets from CNBC.

SEC Chair Jay Clayton: We Should Increase the Attractiveness of Our Public Capital Markets & Increase Opportunities for Main Street Investors in Private Markets

Securities and Exchange Commission Chairman Jay Clayton tipped his hand a bit regarding the ongoing “concept release” – an SEC review of the private securities exemption ecosystem and how regulated private markets operate.  In a speech delivered at the Economic Club of New York this week, Chair Clayton stated:

“We should: (i) increase the attractiveness of our public capital markets as places for companies to raise capital, and (ii) increase the type and quality of opportunities for our Main Street investors in our private markets.”

The comments were made in the context of the fact that, today, private capital markets are far larger than public ones. This is largely due to the reality that becoming a “reporting” company has become very expensive. This is not just a one time cost but an ongoing fee that only the very largest companies can afford. Simultaneously, an ocean of private money from venture capital, family offices, and other institutions has emerged to fund private securities offerings.

Meanwhile, smaller, “Main Street” investors have largely been cut out of the equation as great wealth has been generated for the already wealthy – a group that gains access first to promising, yet risky, early-stage firms.

Chair Clayton highlighted that 25 years ago public markets dominated private markets in “every measure.” This, of course, meant more equal access to investment opportunity. At the same time, today’s private capital markets, are “both unrivaled and coveted around the globe,” Clayton clarified. These private markets have been a boon for US competition and the economy in general. Clayton cautioned that we should not “impair” this source of capital formation.

So what is the solution?

As part of the SEC concept release, the Commission is reviewing the definition of an accredited investor. An update to this currently punitive rule could help alleviate the obvious inequity with the definition. But more can, and should, be done.

It appears that one of the Commission’s solutions may be regulated private capital funds which are open to retail investors.

Clayton stated:

“We are taking a fresh look at this framework, including examining whether appropriately structured funds can facilitate Main Street investor access to private investments in a manner that ensures incentive alignment with professional investors — similar to our public markets — and otherwise provides appropriate investor protections.  Stay tuned.” [emphasis added]

Encouraging words.


SEC Chair Clayton on Bitcoin ETFs: Market Manipulation and Custody Still a Concern

The US Securities and Exchange Commission (SEC) Chair Jay Clayton has told a reporter at CNBC that manipulation in crypto markets remains a concern and that there is “still work to be done” before the Commission can approve Bitcoin exchange-traded fund (ETFs).

Clayton told Bob Pisani that exchanges have come closer to satisfying the SEC on the matter of market manipulation and safe custody of “crypto assets,” but said that remaining questions are “not trivial”:

“Given that they trade on largely unregulated exchanges […] how can we be sure that those prices aren’t subject to significant manipulation? Now progress is being made, but people needed to answer those hard questions for us to be comfortable that this was the appropriate type of product.”

In a previous interview with CNBC, Clayton told the outlet that the SEC is eager to ensure that companies selling tokenized securities and/or crypto derivatives securely possess the assets they intend to issue shares for.

Dozens of cryptocurrency exchanges across the globe have been hacked for billions of dollars in crypto tokens since the Bitcoin network was launched in 2009.

“We’re engaging on (the matter of Bitcoin ETFs,” said Clayton, “but there are a couple of things about it that we need to feel comfortable with. The first is custody: custody is a long-standing requirement in our markets, and if you say you have something you really have it.”

A number of Bitcoin ETF proposals are now before the commission.

Decisions on those proposals may arrive in late September and early October.

VanEck has been working for more than a year to bring a Bitcoin ETF to market. The company recently announced it will selling shares in a Bitcoin Trust to qualified institutional buyers located outside the US.


Quote: Private capital raising is now outpacing capital raising in our public markets, yet our Main Street investors have no effective access to investments in private capital offerings

In the US, the definition of an “Accredited Investor” is an individual who earns over $200,000 a year or has $1 million in net assets minus their primary residence. If you are married, that number moves higher. Yet, as it stands today, this definition does not take into consideration knowledge or investment acumen – a far better determinant as to whether, or not, an investment is appropriate for the individual in question.

While it should be clear to anyone with an iota of common sense that the current wealth metric is a ham-fisted approach to providing an element of investors protection (akin to being able to shoulder a significant loss), this definition has disenfranchised millions of individuals with the capacity to make their own investment decisions without the invisible hand of the federal government telling them no.

To quote a high profile regulator:

“Private capital raising is now outpacing capital raising in our public markets, yet our Main Street investors have no effective access to investments in private capital offerings.”

The importance of this quote is apparent when viewed by who actually made this statement: SEC Chairman Jay Clayton during the annual Small Business Capital Formation Advisory Committee Meeting which took place in Omaha, Nebraska last week.

Many years ago, promising early-stage firms would “go public” to raise growth capital far earlier in their business odyssey.

Apple (NASDAQ:AAPL) (then called Apple Computer) completed an initial public offering (IPO) on December 12, 1980, selling 46 million shares at $22 a pop. If you had purchased 10 shares in 1980, after various stock splits, you would have 560 shares today at a valuation of about $118,000. Not a bad return. Now, shares in Apple did not rise immediately, as the value of the firm ebbed and flowed following the years after its IPO. But the fact remains, smaller investors had a chance and choice to back a promising young firm that today represents one of the most valuable companies in the world.

If you contrast the current IPO market to the days of lore, public offerings have morphed into more of an exit opportunity instead of an entry point as the smart money (mainly VCs) seek the ultimate liquidity event. Today, there is an ocean of private capital willing to fund promising early-stage firms prior to an IPO – jumping ahead of the investment queue. So why on earth would any hot company endure the regulatory requirements and antiquated reporting demands that cost millions of dollars to do? They don’t. The loser in all of this is the smaller investor cut out from the equation of wealth creation. Either by ignorance or intent, the government mandarins have punished smaller investors in an incalculable manner.

The Accredited Investor definition does not only punish savvy investors from participating in the next big thing it also blocks individuals from participating in lower-risk asset classes such as real estate or secured loans.

The advent of online capital formation, facilitated by changes in the securities law (JOBS Act of 2012), has engendered a plethora of securities crowdfunding platforms removing friction from the investment process. Twenty years ago, it took a lot of effort to invest in real estate unless you were big money. Today, you can purchase a highly diversified portfolio of asset-backed properties generating solid returns. With a single exception, you must be deemed an accredited investor and thus mainstream America is boxed out once again.

Brew Johnson, co-founder of PeerStreet – real estate investment site, recently had this to say:

“… our goal of bringing democracy to real estate investing is, so far, only partially realized. Government regulations today are not inclusive for small individual investors. The accredited investor definition effectively categorizes the vast majority of American citizens as less than equal, shut out from many investment opportunities, including platforms like ours.”

Johnson adds:

“The resulting regulations contribute to further widening the gap between the wealthy and the middle class, as well as create illogical distortions between investment products.”

By now, it should be obvious the current definition is broken and must be changed without delay.

Currently, the SEC is pursuing a regulatory harmonization review and has published a concept release on existing securities law. One of the topics is the definition of an accredited investor. In reflecting upon Chair Clayton’s statement above, and in speaking to various insiders, it appears that the Commission is inclined to address the glaring shortcoming in the definition of an Accredited Investor. This publication says it is about time and we hope they move forward at the Commission level.

We highly recommend individuals interested in democratizing access to opportunity to comment on the SEC’s concept release. You may do so here.

Whether the definition is changed to incorporate a sophistication qualification, or eliminated in its entirety, its time for the old rule to go. Let’s hope the SEC acts independently of any looming legislation and rights this nagging wrong.

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SEC Chair Jay Clayton Schedules Meet Up for Main Street Investors in Chicago on the 15th

Securities and Exchange Commission Chairman Jay Clayton has booked an event for “Main Street investors” to be held in Chicago on Thursday, August 15. The event will come a day after the SEC’s annual Government-Business Forum on Small Business Capital Formation taking place in Omaha.

The last-minute event will be held at the SEC’s Regional Office in Chicago. Clayton is expected to participate in a roundtable with investors as part of the SEC’s “ongoing investor engagement and education efforts.”

The SEC says the roundtable will focus on issues such as tips to avoid fraud, the impact of fees and costs, and the differences between broker-dealers and investment advisers. No word if he will tackle the hot topic of digital assets or the ongoing concept release regarding the potential for regulatory harmonization. The current private securities exemption market has been criticized as benefiting the wealthy while excluding retail investors.

Director Lori Schock from the SEC’s Office of Investor Education and Advocacy is expected to join Chairman Clayton at this event.

Chairman Clayton issued the following statement:

“I have heard from investors around the country that they wish they knew more about investing, including how to identify various red flags of fraudulent investment schemes and understanding the impact that fees and costs can have on investments. Helping Main Street investors make informed decisions about their financial future continues to be one of my top priorities as Chairman. An important part of this process is to hear directly from Main Street investors of all types.  I look forward to a productive discussion in Chicago.”

The event is free and open to the public and the media. The number of participants for the event may be limited.

Main Street Investor Roundtable

Location: U.S. Securities and Exchange Commission, Chicago Regional Office – 175 W. Jackson Blvd. Chicago, IL 60604
Date: August 15, 2019
Time: 10:30 a.m. to 11:30 a.m., Registration begins at 10:00 am

Concept Release: The Securities and Exchange Commission Asks for Feedback on Ways to Harmonize Securities Exemptions

The Securities and Exchange Commission is seeking comments on the current securities exemption structure. In a release yesterday, the SEC asked the public to provide feedback on “ways to simplify, harmonize, and improve the exempt offering framework to expand investment opportunities while maintaining appropriate investor protections and to promote capital formation.”

In the US, there is an alphabet soup of securities exemptions, or methods for companies to raise capital, while remaining compliant under the law. The rules have been created over decades with tweaks and additions that have added to what can only be described as a mish-mash of convoluted rules.

For ordinary people, the structure is Byzantine at best. The only true beneficiaries are lawyers steeped in the acronym-speak of securities law. Issuers pay dearly for this knowledge.

For online capital formation, this publication frequently references Reg D506c, Reg A+ and Reg CF, even while recognizing the fact that most people find this confusing as they simply want to raise capital while being compliant.

Part of the equation and SEC consultation is the definition of an “accredited investor.” Long in use, the current rule is wealth based demanding individuals that qualify to earn over $200,000 a year or have a net worth of more than $1 million. While simple to apply, this metric has failed in recognizing investor sophistication. While common sense dictates that wisdom is not measured by cash in the bank, the current regime has disenfranchised tens of millions of investors. As private markets have become a preferred route for capital formation, the net effect has been to block the masses from some of the most promising investment opportunities in history. Meanwhile, the rich get wealthier.

The SEC has long discussed their project to review securities exemption harmonization. The common-sense initiative was launched by SEC Chair Jay Clayton who commented on the request for public feedback:

“We are taking a critical look at our exemptions from registration to ensure that our multifaceted private offering framework works for investors and entrepreneurs alike, no matter where they are located in the United States. Input from startups, entrepreneurs, and investors who have first-hand experience with our framework will be key to our efforts to analyze and improve the complex system we have today.”

While it is not clear if there will be an actionable outcome, the project is long overdue.

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The concept release seeks input on whether changes should be made to improve the entire exemption ecosystem. The SEC is asking for feedback on the following topics:

  • The limitations on who can invest in certain exempt offerings, or the amount they can invest, provide an appropriate level of investor protection or pose an undue obstacle to capital formation or investor access to investment opportunities
  • The Commission should take steps to facilitate a company’s ability to transition from one offering to another or to a registered offering
  • The Commission should expand companies’ ability to raise capital through pooled investment funds
  • Retail investors should be allowed greater exposure to growth-stage companies through pooled investment funds such as interval funds and other closed-end funds
  • The Commission should revise its exemptions governing the secondary trading of securities initially issued in exempt offerings

Crowdfund Insider asked Doug Ellenoff, Managing Director of Ellenoff Grossman & Schole and longtime advocate of financial innovation for his thoughts on harmonization. Ellenoff credited the SEC staff for pursuing a more rational approach to private offerings exemptions:

“In the aftermath of the JOBS Act of 2012, the rules have only become more arcane and I believe more confusing for the public to navigate these regulatory financing options.  While I appreciate the need and history of each of the provisions, other than securities lawyers, what entrepreneur is able to properly process the range of currently available options (pros and cons; expenses etc.)–4(a)(2); 4(a)(6); Rule 504; Reg D– 506(b); 506(c); 3(a)(11), Rule 147 and Rule 147A; Reg A and Reg A+,” stated Ellenoff.

He said there is just no simple, common sense way to explain these provisions:

“I have spoken at hundreds of events to glazed over audiences trying to convey it in a digestible manner … and even seasoned securities lawyers are having trouble making sure their clients truly understand how to proceed legally and make the right judgment call,” Ellenoff stated. “So it’s timely in my judgment to clarify and meaningfully crowdsource responses to the SEC’s list of dozens of questions.  I encourage everyone’s participation.   This is a significant challenge but a magnificent chance to make a meaningful impact on capital formation for entrepreneurs to effect securities law policy.”

Maxwell Rich, a securities attorney and Chief Compliance Officer of leading crowdfunding platform Republic had this to say:

“Republic supports the Commission’s efforts in studying ways that the various registration exemptions used to raise capital in the United States can be simplified, harmonized and improved. While regulation crowdfunding is a nascent and emerging capital formation framework, its interactions with other exemptions such as Reg D and Reg A+ lack synergy and symmetry, which causes investor and issuer confusion.”

Rich said they hope this study will provide “common sense and actionable recommendations” for expanding investment and capital raising opportunities while maintaining appropriate investor protections.

Youngro Lee of NextSeed 3Youngro Lee, founder and CEO of NextSeed and Chair of the Association of Online Investment Platforms, added his voice of support for the SEC’s harmonization initiative.

“This is a very positive development for the future of small business capital formation laws.  The original JOBS Act was instrumental in launching a new industry seeking to provide opportunities for small businesses and everyday investors, but there were real challenges presented by the legal limitations.  Thoughtful harmonization of the various confusing securities offering exemptions could truly accelerate the adoption of new capital formation laws for the benefit of everyone.”

By requesting the public’s feedback on regulatory harmonization we can expect a diversity of opinion on the matter. But in the end, it is what the SEC does with the information. And whether they are willing to act, or alternatively, they feel a need to pass the buck over to Congress.

Regardless, it is painfully obvious action is needed.

The public comment period for the concept release will remain open for 90 days following publication of the release in the Federal Register.



The Commission issued a concept release that reviews the framework for exempt offerings, including several exemptions from registration under the Securities Act of 1933 that facilitate capital raising.  The concept release seeks comment on possible ways to simplify, harmonize, and improve this exempt offering framework to expand investment opportunities while maintaining appropriate investor protections and promote capital formation.


Over the years, and particularly since the Jumpstart Our Business Startups Act of 2012, several exemptions from registration have been introduced, expanded, or otherwise revised.  As a result, the overall exempt offering framework has changed significantly.  Our capital markets would benefit from a comprehensive review of the design and scope of the Commission’s exempt offering framework.


The concept release requests comment on:
The Exempt Offering Framework Whether the Commission’s exempt offering framework, as a whole, is consistent, accessible, and effective for both companies and investors or whether the Commission should consider changes to simplify, improve, or harmonize the exempt offering framework.
The Capital Raising Exemptions within the Framework Whether there should be any changes to improve, harmonize, or streamline any of the capital raising exemptions, specifically: the private placement exemption and Rule 506 of Regulation D, Regulation A, Rule 504 of Regulation D, the intrastate offering exemptions, and Regulation Crowdfunding.
Potential Gaps in the Framework Whether there may be gaps in the Commission’s framework that may make it difficult, especially for smaller companies, to rely on an exemption from registration to raise capital at key stages of their business cycle.
Investor Limitations Whether the limitations on who can invest in certain exempt offerings, or the amount they can invest, provide an appropriate level of investor protection (i.e., whether the current levels of investor protection are insufficient, appropriate, or excessive) or pose an undue obstacle to capital formation or investor access to investment opportunities, including a discussion of the persons and companies that fall within the “accredited investor” definition.
Integration Whether the Commission can and should do more to allow companies to transition from one exempt offering to another and, ultimately, to a registered public offering, if desired, without undue friction or delay.
Pooled Investment Funds Whether the Commission should take steps to facilitate capital formation in exempt offerings through pooled investment funds, including interval funds and other closed-end funds, and whether retail investors should be allowed greater exposure to growth-stage companies through pooled investment funds in light of the potential advantages and risks of investing through such funds.
Secondary Trading Whether the Commission should revise its rules governing exemptions for resales of securities to facilitate capital formation and to promote investor protection by improving secondary market liquidity.

What’s Next?

The Commission welcomes all feedback and encourages interested parties to submit comments on any or all topics of interest and to respond to one, multiple, or all questions asked in this release.

The concept release will be published on the Commission’s website and in the Federal Register.  The comment period will remain open for 90 days from publication in the Federal Register.

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SEC Chairman Jay Clayton Discusses Cryptocurrencies and New Rules Covering Broker-Dealers, Won’t “Just Flip a Switch” on Crypto

The SEC has voted to implement a new rule compelling securities broker-dealers to act in clients’ best interests.

SEC Chairperson Jay Clayton spoke about the new rule, as well as the SEC’s treatment of cryptocurrencies, in a televised interview for CNBC’s Squawk Box program June 6th. 

“We’re raising the standard of conduct for broker-dealers…we’re covering more of the advice spectrum…” he said, including the type of advice given when a client moves funds between “account types,” such as moving a 401K into a different style of account.

As well, said Clayton, under the new rules, “If you’re a broker-dealer or an investment advisor, you’ve got to tell people how you make your money.”

The previous rule set, he said, “…wasn’t clear enough…”

Clayton then defined fiduciary duty generally as “a combination of care and loyalty…and you can’t put your interests ahead of (client) interests.”

CNBC panelist Kevin O’Leary said that as a “participant in financial services,” his highest rising costs are in compliance. He then asked Clayton, “Are you stifling innovation a little bit in the broker-dealer space by making it so expensive to stay alive?”

“No,” said Clayton.

“No,” he repeated. “I think what investors need to know is how much of their money is going to work for them…put it on two pages…(or) less four pages (if doing both functions)…tell people how you make your money, tell them what your conflicts are, and they can make informed choices…”

Clayton cited statistics indicating that competition in financial services is putting more money into investors’ pockets

Clayton also said the SEC is “engaging on” the matter of cryptocurrency derivatives products, such as ETFs, but, “…there’s a couple things we need to feel comfortable on.”

More than a dozen proposals for rule changes to allow the selling of Bitcoin-based ETFs have been submitted at the SEC, but none have so far been approved.

“One (of the issues of concern for the SEC) is custody,” said Clayton.

“If you say you have something, you really have it. When we get into the retail space, custody is important…” he said.

Secure storage of “crypto assets” has been an issue to date, and crypto investment firms like Bakkt are working hard to solve the problem.

Cryptocurrencies/digital tokens are comprised of code, and that code can be accessed by hackers.

According to anonymous blogger “Neuron,” more than $15 billion USD in cryptocurrencies/tokens have been stolen from cryptocurrency exchanges since the invention of Bitcoin.

As well, “stablecoin” company Tether is now in hot water with the New York Attorney General for loaning its reserves to sister company Bitfinex.

Earlier this year, Bitfinex experienced a liquidity crunch after $850 million USD of the exchange’s funds were seized by officials in Panama on behalf of several foreign governments.

Clayton told CNBC panelists that cryptocurrencies have been marketed to resemble stocks, but the trading of them is not as regulated as it is in conventional securities markets.

“We have sophisticated rules and surveillance to make sure that people are not manipulating the stock market. Those cryptocurrency markets by-and-large do not have that. And we’re working hard on that. But I’m not just gonna flip a switch and say it’s just like stocks and bonds. Cuz it’s not.”

He ended by stating that SEC rules have made US capital markets the strongest and most envied in the world.

Watch CNBC’s full interview with SEC Chairman Jay Clayton from CNBC.

Heard on F Street: SEC Fintech Forum Engages with Crypto Industry to Discuss Digital Asset Regulation

Last Friday, the Securities and Exchange Commission (SEC) held its first Fintech Forum in years. The topic of discussion was the regulation of digital assets and distributed ledger technology (DLT). The interaction between presenters and SEC staff provided a glimpse into the progress and struggle behind regulating the new iteration of securities.

The Promise of the New Technology

“DLT works to create ecosystems the likes of which we have not been imagined before now,” stated Valerie Szczepanik, the head of the SEC’s FinHub as she opened proceedings.

While still nascent, said Szczepanik, DLT has created a way to transfer value but unlike speech on the internet, transfer of value can be highly regulated. It is important for the regulators to better understand the potential benefits as well as the risks she explained.

“We want to encourage beneficial innovation,” said Szczepanik. “While guarding against any harmful consequence. That balancing act is a difficult one. And we as regulators want to get that balance right. Why? Because it can mean the difference between fostering efficient and safe new ways to raise capital and trade assets on the one hand, or potentially permitting harmful systems, products, and practices on the other.”

One result can help markets. The other result can “cast a dark shadow” on the new technology, something that would dim the potential for innovation.

That is a result that no one who supports this technology would want, said Szczepanik.

SEC Chairman Jay Clayton was present for the opening of the event. Clayton said DLT is a new technology that has great promise for both efficiency and ability:

“But it doesn’t fit neatly into any spot within the Commission,” Clayton stated.

He expressed his opinion that blockchain possessed promise as well as challenges and lauded Szczepanik’s considerable efforts at the Commission.

Following a complimentary introduction by Chair Clayton, Crypto Mom – SEC Commissioner Hester Peirce, made a few comments.

Peirce said the opportune moment is now to work with the developers of the technology to make certain a well-intentioned framework is not an unnecessary barrier to the achievement of something good for society. The popular Commissioner attended a good portion of the Forum as an observer.

The scheduled panels were informative if lawyer heavy. Of note, Directors of the various SEC divisions took the opportunity to provide some insight into their regulatory perspective.

As previously reported, SEC Director of Corporate Finance, Bill Hinman, told the audience that a token may exist, and trade, while not being a security. While lacking in clarity, this comment should provide hope to utility token proponents. Hinman said we (the SEC) are eager to see the technology succeed.

Brett Redfearn, Director of Trading and Markets at the SEC, said that many regulations are still evolving. Redfearn assured the audience that just because trading takes place on a public blockchain securities law still applies. Otherwise, this would “disregard the Commission’s well-established framework for regulating exchanges.”

“Those online trading platforms located off-shore that offer securities services to persons in the United States, or solicit US investors to engage in primary or secondary trading of securities, also must register here [in the US],” sated Redfearn – without mentioning any specific crypto exchanges by name.

Thus an external crypto exchange must take “reasonable” steps to assure US persons do not utilize their services – unless they are registered as an exchange. These are early days for blockchain and Fintech in general, said Redfearn.

“Many digital asset trading platforms still suffer from poor execution quality, wash trading, and other manipulative devices,” warned Redfearn.

Dalia Blass, the SEC Director of the Division of Investment Management, addressed the topic of funds, such as ETFs, that may hold crypto and their approach to regulating these types of digital assets.

“Our request for conversation has fostered a number of constructive conversations and given the staff information to further our understanding,” Blass said.

Questions such as custody, valuation, liquidity, and the potential for manipulation were addressed in an open consultation commenced by Blass back in early 2018.

Blass said that some of the most constructive input has recognized that technological innovation is important but so is the investor focused foundation of the investment company act. She believes rules that have previously served the Commission well should not be sacrificed just to promote a nascent technology nor new investment type. More specifically, those targeting main street investors.

“Our doors are always open,” Blass told the audience, encouraging crypto-entrepeneurs to share their ideas with them.

The Director of the Office of Compliance, Inspections, and Examination, Pete Driscoll, told the audience they strongly embrace innovation and technology. Tech can drive down cost and improve investment returns. Driscoll said that the OC continues to closely monitor the issuance and trading of digital assets.

“OC is taking steps to identify market participants offering, selling, trading, and managing these products or considering, or actively seeking to manage these products and then assess the extent of their activities.”

In 2018, OC launched an investigation into investment advisory activity related to cryptocurrencies, initial coin offerings, secondary market trading, and blockchain technologies in general.

This continues to be a priority for OC in 2019, said Driscoll. He shared that regulated advisors are treading carefully before entering this space.

“When you get too prescriptive things tend to go out of date rather quickly.”

While the desire for perfection should not get in the way of innovation, the message was clear. The SEC is hesitant to over-regulate, or craft new rules, before they completely understand the evolving technology and what it means for regulated markets.

It is the hope of many industry participants that the SEC does not wait another three years for their next Fintech Forum.

If you have the time, and have not already viewed the SEC Fintech Forum, you may view it here.

The SEC and CFTC Join in Signing IOSCO Multilateral Memorandum of Understanding on Cross Border Enforcement

The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have both signed the IOSCO Enhanced Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (EMMoU). The announcement comes following the 44th Annual International Organization of Securities Commissions (IOSCO) Conference which took place last week in Sydney, Australia. The EMMoU seeks to boost cross-border enforcement amongst the IOSCO members.

IOSCO is the international forum that brings together the securities regulators from around the world to discuss and coordinate on issues of mutual interest. IOSCO works both with the G20 and the Financial Stability Board (FSB) on the global regulatory reform agenda.

During the Sydney meeting, participants engaged it a wide variety of topics impacting the securities industry today.  Topics addressed, “What is the role of securities regulators in sustainable finance?” Or “Are regulators agile enough in the face of rapidly evolving Fintech innovation?”

The EMMoU builds upon a previous MMoU signed by 123 regulators in 2002. Both the CFTC and the SEC were signatories of that document as well. The predecessor document is viewed as the “benchmark for cross-border cooperation in enforcement.”

In the past 17 years, things have changed in global markets. Signatories of the EMMoU  have agreed to “new forms of assistance critical to effective enforcement, such as obtaining compelled testimony and obtaining asset freezes to protect customer funds, among other powers.”

SEC Chairman Jay Clayton who attended the IOSCO event stated:

“As investment products, services and markets evolve, it is critical that the international community of securities and derivatives regulators continue to cooperate to protect investors from bad actors perpetrating fraud across borders. The SEC took an active role in negotiating and drafting the EMMoU with the intent of building upon the tremendous success of the MMoU in facilitating international cooperation. This signing demonstrates the SEC’s continued strong commitment to combatting securities and derivatives fraud against American investors – including fraud which is carried out outside our borders.”

CFTC Chairman J. Christopher Giancarlo, who was also in attendance, added:

“The CFTC is proud to be part of the inaugural group of signatories to the EMMoU and to demonstrate its commitment to international enforcement cooperation. In today’s world of rapidly evolving technology and increasingly global financial markets, securities and derivatives violations frequently involve cross-border misconduct.  As a result, effective enforcement requires that regulators around the world ensure that they are able to cooperate fully with their regulatory counterparts to ensure that investors are protected, markets are safeguarded and wrongdoers are held accountable.”

What are the key new EMMoU powers?

The additional key powers that IOSCO has identified as necessary to ensure continued effectiveness in safeguarding market integrity and stability, protecting investors and deterring misconduct and fraud include:

  • To obtain and share Audit work papers, communications and other Information relating to the audit or review of financial statements
  • To Compel physical attendance for testimony (by being able to apply a sanction in the event of non-compliance).
  • To Freeze assets if possible, or, if not, advise and provide information on how to Freeze assets, at the request of another signatory
  • To obtain and share existing Internet service provider (ISP) records (not including the content of communications) including with the assistance of a prosecutor, court or other authority, and to obtain the content of such communications from authorized entities.
  • To obtain and share existing telephone records (not including the content of communications) including with the assistance of a court, prosecutor or other authority, and to obtain the content of such communications from authorized entities.

Additionally, The EMMoU envisages the obtaining and sharing of existing communications record held by regulated firms.

Has the SEC Slammed the Brakes on Blockchain Innovation?

The Securities and Exchange Commission (SEC) has talked up their innovation cred and support of Fintech for years. Under previous Chair Mary Jo White, the SEC held the very first Fintech Forum which saw both industry participants and policymakers engage with each other in collaborative discussion.

Back in 2016, Valerie Szczepanik, currently the head of the SEC’s FinHub and then Head of  Distributed Ledger Technology, moderated a panel on the impact of innovations on trading, settlement, and clearance activities – an important topic that continues to be relevant for the blockchain sector.

SEC officials are regularly in attendance at Fintech focused events telling the audience to stop by and chat with them as they are anxious to learn more about emerging innovations in financial services.

Any Fintech or crypto focused firm worth its salt has visited with SEC staff to pitch and discuss their concepts at the F Street Headquarters.

Several weeks back, the SEC “approved” a non-security, utility token from Turnkey Jet while providing guidance on the issuance of security tokens. Certainly progress of sorts, but critics groaned there was little new revealed by the Commission. The no-action letter on the utility token garnered this ironic response:

“In other words; [a] Laundromat token deemed to be laundromat token.”

But chatter outside the beltway has been growing in criticism. Recently, Scott Purcell, CEO and founder of PrimeTrust – a crypto friendly escrow and custody platform, made the following statement:

“Jay Clayton, Chairman of the SEC, is, I’ve heard, holding the line that no new alternative trading system (“ATS”, aka “exchange”) will be approved on his watch if it intends to trade tokens.”

Crowdfund Insider has heard similar comments from other insiders.

Not very encouraging words for people dedicating their careers to improving the financial ecosystem by enabling the digitization of finance.

Last month, FINRA and the SEC jointly announced a Broker-Dealer “Outreach Program,” scheduled to take place this coming June. Currently scheduled for the agenda will be “regulatory hot topics such as digital assets and cyber-security.”

One blockchain industry insider made the following somber comment on the FINRA-SEC event:

“If they limit this event to existing BDs, no one in the [blockchain] industry will be able to attend…”

Even worse, the event was capped at only 250 broker-dealers. That’s one way to mitigate extensive debate and discussion.

CI recently was informed there have been over 40 applications submitted by blockchain focused firms to become a Broker-Dealer. Apparently, none have been approved and multiple applications allegedly have gone far beyond the statutory deadline for a decision to approve (or not). So the Feds are allegedly bending their own rules.

Some of these applicants also want to become alternative trading systems (ATSs) which can trade in digital assets thus enabling secondary transactions for security tokens. But receiving regulatory approval as a Broker-Dealer must come first before receiving an ATS license.

One frustrated insider stated simply, “it is totally f****d.”

Ironically, blockchain industry participants want regulation. They recognize the importance of setting high standards and allowing only compliant firms to operate. People who want to tokenize assets are saying “fine these are securities let us treat them as such and broker the deals.”

FINRA is part of the broker-dealer equation as well.

Apparently, FINRA continues to ask for extensions as an approval deadlock continues. Meanwhile … unregulated exchanges carry on outside US borders.

One individual said, “they [the SEC and FINRA] are each finger pointing but ultimately it is the SEC…” that is the source of any delay.

It is no secret that many potential digital asset issuers have filed for a Reg A+ qualification to sell security tokens, yet none have been approved.

Most aspiring token issuers have simply scrubbed any mention of blockchain, crypto, distributed ledger technology or digital assets from their filings just to get approved. Now, the strategy is to go back and tokenize the offerings once regulatory clarity emerges – whenever that is.

One recent example of Reg A+ inertia is StartEngine. To get qualified, StartEngine – a full stack crowdfunding platform, erased any mention from their Reg A+ filing regarding the tokenization of securities using ERC-1450 and the ability for investors to use Bitcoin or ETH to invest.

Another industry insider bluntly claimed they are “purposefully trying to kill the industry and doing a damn good job of it.”

So what’s going on? Aren’t these just digital securities?

Some people believe that Chair Clayton simply wants to dodge a bullet and exit before the next election cycle hits in full force. He would prefer to end his tenure at the SEC minus any major catastrophes, imaginary or not. Of course, there is always the possibility of a Twitter assault from the President. That’s no fun either – and something most people would like to avoid.

But while US policymakers pump the brakes on Fintech innovation, some other nations push forward encouraging change.

France, not really well known for its innovation chops, has concocted a system to approve initial coin offerings (ICOs) by creating a white list approved by the Autorité des Marchés Financiers (AMF). A new law has been approved (Loi Pacte) and is expected to become actionable at some point this fall.

During Paris Blockchain Week, Bruno Le Maire, the Minister of Industry for the Economy and Finance, stated:

“I believe in the blockchain, I believe in this technology.”

One observer said the is the first time that such a clear alignment has emerged between French government vision, regulation, and the promotion of innovation when it comes to digital assets.

Just this week, one of the largest banks in France, Societe Generale, issued a tokenized bond using Ethereum.

The former head of Fintech at the AMF said they are now seeing US digital asset issuers coming to France to pursue their projects.

In Germany, BaFin – a regulator notorious for its conservative stance, recently approved a tokenized bond issuance from a Fintech that offers peer to peer loans around the world.

Of course, the counter-argument is that it is wise to move cautiously in the digital asset sector.

Regulators need to gather as much information as possible before moving forward as investor protection is an ongoing pressing concern. Public officials must learn from the many mistakes of the crazed ICO marketplace – a sector of crypto that was chock full of fraud and half baked offerings. But can the regulators wait too long?

Talk is Cheap. Action Speaks Volumes.

This month, the SEC will host another Fintech Forum with much of the discussion scheduled around distributed ledger technology and the emergence of digital assets. One panel is scheduled to discuss “Distributed Ledger Technology Innovations: Industry Trends and Specific Use Cases for Financial Markets.”

But missing from the list of participants and speakers are names from some of the most innovative platforms in the blockchain space.

Why no tZero? What about Securitize and OpenFinance? And how about inviting Purcell to speak? (Perhaps they were invited and declined…).

Following the release of the Fintech forum agenda this week, CI received this snarky comment in an email:

“Oh great, so out of over 20 panelist and moderators for the Fintech forum only one actual Fintech company – makes sense…”

So when does the SEC finally accept the future and embrace the digitization of finance?

Coincenter Publishes Correspondence with SEC Chair Jay Clayton: Digital Assets May Be Sold as a Security but Could Change Over Time

Coincenter, a leading advocacy group for the cryptocurrency/virtual asset space, has shared a recent correspondence with SEC Chairman Jay Clayton. Chair Clayton responded last week to a letter originally sent last October by Congressman Ted Bud who was seeking additional clarity on crypto and its regulatory status.

Clayton addresses the concept of a digital asset and its ability to start life as a security but then morph into something else later on.

The discussion is a direct allusion to a speech delivered by Bill Hinman, Director of Corporate Finance at the SEC. In July of 2018, Hinman said that Ethereum is not a security but did not directly address the original issuance of Ethereum.  In brief, Ethereum is decentralized and thus does not by managerial efforts of others.

Chair Clayton states:

“I agree with the analysis of whether a digital asset is offered or sold as a security is not static and does not strictly inhere to the instrument. A digital asset may be offered and sold initially as a security because it meets the definition of an investment contract, but that designation may change over time if the digital asset later is offered and sold in such a way that it will not longer meet that definition. I agree with Director Hinman’s explanation of how a digital asset transaction may no longer represent an investment contract if, for example, purchasers would no longer reasonably expect a person or group to carry out the essential managerial or entrepreneurial efforts. Under those circumstances, the digital asset may not represent an investment contract under the Howey framework.”

The statement above provides little additional clarity and Chair Clayton continues to reference the need for facts and circumstances evaluation regarding each issuance of a digital asset. But it does reaffirm the SECs stance that Ethereum is not a security – and perhaps other cryptocurrencies like ETH.

The SEC Wants to Extend Test the Waters for Issuers and That’s Good Thing

Yesterday, the Securities and Exchange Commission (SEC) proposed a reform that would permit potential issuers to gauge investor interest prior to pursuing an offering. According to the SEC, the new rule and related amendments would expand the “test-the-waters” process, currently available to emerging growth companies or “EGCs,” to all issuers, including investment company issuers.

Prior to an initial public offering (IPO) or other registered securities issuance, the company would be able to measure investor interest. The rule is frequently used for Reg A+ issuers.

The SEC notes that companies with more than $1 billion in annual revenues do not qualify as EGCs and, therefore, have not benefitted from JOBS Act provisions intended to foster capital formation in the public markets. This action follows a change by the SEC Division of Corporation Finance in 2017 to extend another EGC reform to all issuers: the ability to initially submit certain filings in draft, non-public form.

As a result of that policy change, all issuers, not just EGCs, have been able to make non-public filings with the SEC as they begin the process of becoming a public company.

Pursuing an offering can be an expensive undertaking. If an issuer “tests the water” and investor demand is lacking, the company can save substantial amounts of money.

SEC Chairman Jay Clayton commented on the proposal:

“Extending the test-the-waters reform to a broader range of issuers is designed to enhance their ability to conduct successful public securities offerings and lower their cost of capital, and ultimately to provide investors with more opportunities to invest in public companies. I have seen first-hand how the modernization reforms of the JOBS Act have helped companies and investors. The proposed rules would allow companies to more effectively consult with investors and better identify information that is important to them in advance of a public offering.”

Clayton has repeatedly stated that access to capital for smaller firms is a priority during his tenure at the Commission.

The proposal now commences a 60 day comment period following publication in the Federal Register.



Solicitations of Interest Prior to a Registered Public Offering

Feb. 19, 2019


The Securities and Exchange Commission proposed a rule and related amendments under the Securities Act that would enable all issuers to engage in test-the-waters communications with certain institutional investors regarding a contemplated registered securities offering prior to, or following, the filing of a registration statement related to such offering. These communications would be exempt from restrictions imposed by Section 5 of the Securities Act on written and oral offers prior to or after filing a registration statement and would be limited to qualified institutional buyers (QIBs) and institutional accredited investors (IAIs). The expanded test-the-waters provision, as proposed, would provide all issuers with appropriate flexibility in determining when to proceed with a registered public offering while maintaining investor protections.


In 2012, Congress passed the Jumpstart Our Business Startups Act (JOBS Act), which created Section 5(d) of the Securities Act. Section 5(d) permits an emerging growth company (EGC) and any person acting on its behalf to engage in oral or written communications with potential investors that are QIBs and IAIs before or after filing a registration statement to gauge such investors’ interest in a contemplated securities offering. The proposed rule will extend the “test-the-waters” provision to non-EGCs and thereby encourage more issuers to consider entering our public equity markets.

Highlights and the Proposal

Proposed Securities Act Rule 163B

Proposed Securities Act Rule 163B would permit any issuer, or any person authorized to act on its behalf, to engage in oral or written communications with potential investors that are, or are reasonably believed to be, QIBs or IAIs, either prior to or following the filing of a registration statement, to determine whether such investors might have an interest in a contemplated registered securities offering. The proposed rule would be non-exclusive and an issuer could rely on other Securities Act communications rules or exemptions when determining how, when, and what to communicate related to a contemplated securities offering.

Under the proposed rule:

  • there would be no filing or legending requirements;
  • test-the-waters communications may not conflict with material information in the related registration statement; and
  • issuers subject to Regulation FD would need to consider whether any information in a test-the-waters communication would trigger disclosure obligations under Regulation FD or whether an exemption under Regulation FD would apply.

Back to Work: Securities and Exchange Commission is Back on the Job as Government Re-Opens

The Securities and Exchange Commission (SEC) is back on the job as President Trump signed a bill that will re-open the government for three weeks – until February 15th. The closure of federal offices was due to a political spat between the Democrats and the White House over funding of a border wall. While there is still no agreement on “border security” there is some latent hope that moderate Democrats will join with Republicans to find a resolution for the two entrenched sides. In a twist of irony, some reports have claimed the shutdown cost far more to the economy than the cost of President Trump’s wall. But then you get the government that you elect.

While the government shutdown impacted just 25% of federal operations, the government is quite large and many private sector businesses depend upon it. The SEC was one of the federal agencies that shuttered its doors dropping from a normal staff level of more than 4400 to just a few hundred. This impacted certain companies seeking to raise capital or go public, including Reg A+ crowdfunding issuers.

Yesterday, the SEC posted an update on their site regarding recommencement of operations and SEC Chair Jay Clayton published a public statement addressing the return to normal operations.

The SEC stated:

The Securities and Exchange Commission is currently open, fully staffed, and focused on our mission.

A statement from SEC Chairman Jay Clayton can be found [below].  Additional information from certain SEC Divisions and Office regarding their transition to normal operations will be posted here in coming days.

Information for Contractors
With a short term, Continuing Resolution signed into place, all contracts are now in full performance (no suspension) and should be back to normal operations as soon as possible. Contractors should contact their CORs and CO’s to renew normal operations and find solutions to problems caused by the lapse in appropriation. Thank you for your continued support of the SEC.

While the doors may have re-opened one can only wonder how long it will take SEC staffers to regain their sea-legs from the backlog of filings, enforcement actions, and public requests. While staffing may be at a normal level expect a period of slower responses and delays. This will be aggravated even further if the White House and Congress cannot compromise for the health of the economy and for the benefit of the nation by Valentines Day.

Statement by SEC Chairman Jay Clayton

The Securities and Exchange Commission has resumed normal staffing levels and is returning to normal operations.

Over the past 30 days, with a limited staff, we followed our Operations Plan Under a Lapse in Appropriations and Government Shutdown.  This plan focused on monitoring the functioning of our markets and, as necessary to prevent imminent threats to property, taking action.  I commend our staff for their dedication to this task.  They performed admirably and, as always, with a keen focus on the interests of our Main Street investors.

Our approximately 4,500 employees are now returning to their posts in our Washington, D.C. home office and our 11 regional offices.  The leaders of our Divisions and Offices, in consultation with various members of our staff, are continuing to assess how to most effectively transition to normal operations.  Certain of these Divisions and Offices, including our Divisions of Corporation Finance, Trading and Markets, Investment Management and our Office of Compliance Inspections and Examinations, will be publishing statements in the coming days regarding their transition plans.

These statements regarding our transition to normal operations will be available at

In closing, a personal note:  I have noted in the past that our people are our greatest asset.  They bring experience, expertise and commitment to work every day for the benefit of our economy, our markets and, most importantly, our investors.  The past 30 days have underscored just how true that is.  It is my privilege to welcome back the full team.

SEC to Allow Reporting Companies to Use Reg A+ Securities Exemption to Raise Capital

Long requested by Reg A+ fans, the Securities and Exchange Commission (SEC) has approved final rules that will allow reporting companies to utilize the Regulation A (frequently referenced as Reg A+) exemption to raise capital.

The amendments to Reg A+ will become effective upon publication in the Federal Register.

Regulation A was improved under Title IV of the JOBS Act of 2012 and is viewed as one of three crowdfunding options for firms to raise capital online. Currently, issuers that are reporting companies, firms that trade on a regulated exchange, may not use Reg A+.

Reg A+ has also become popular with aspiring security token issuers, although not a single security token offering under the exemption has been qualified by the SEC.

SEC Chairman Jay Clayton stated:

“Regulation A provides an exemption from registration under the Securities Act for offerings of securities up to $50 million in a 12-month period. The amended rules will provide reporting companies additional flexibility when raising capital.”

The amendments, mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act, will enable companies that are subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 to use Regulation A. The amendments also permit such reporting companies to meet their Regulation A ongoing reporting obligations through their Exchange Act reports.

The SEC has provided a Fact Sheet for updated Reg A+ Rules


Regulation A provides an exemption from registration under the Securities Act of 1933 for offerings of securities up to $50 million in a 12-month period.  Currently, Regulation A is not available to companies that are Exchange Act reporting companies. The Economic Growth, Regulatory Relief, and Consumer Protection Act, enacted earlier this year, required the Commission to revise Regulation A to allow reporting companies to use the exemption.

The final rules amend Securities Act Rule 251 to permit companies subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act to use Regulation A. The final rules also revise Securities Act Rule 257 to provide that companies that meet the reporting requirements of the Exchange Act will be deemed to have met the reporting requirements of Regulation A.

In connection with these amendments, the Commission also made other conforming changes to Regulation A and Form 1-A.

SEC Chair Jay Clayton told Senate Banking Committee they are Focusing Significant Attention on Digital Assets & ICOs

Last week, the Securities and Exchange Commission (SEC) Chair Jay Clayton addressed the Senate Banking Committee. His testimony was a routine trip to Capitol Hill when Chair Clayton is expected to update Congress on their regulatory initiatives and any challenges. Topics included the declining IPO market, in part driven by the excessive cost of compliance, along with other topics such as Brexit, during the shortened hearing.

Clayton reaffirmed his statement that he continues to be of the opinion that existing securities law has served the emerging market of initial coin offerings have served the market well.

As part of Chair Clayton’s submitted testimony, which usually differs from opening statements given at hearings like this, Clayton said that “significant amount of attention and resources” have been focused on digital assets, ICOs and the emerging crypto marketplace.

The complete submitted testimony is available here with the segment that addresses digital assets republished below. You may watch the archived video of the hearing here.

Distributed Ledger Technology, Digital Assets and Initial Coin Offerings

The Commission and its staff have been focusing a significant amount of attention and resources on digital assets and initial coin offerings (ICOs).  I am optimistic that developments in distributed ledger technology can help facilitate capital formation, providing promising investment opportunities for both institutional and Main Street Investors.  Overall, I believe we have taken a balanced regulatory approach that both fosters innovation and protects investors.  For example, our staff meets regularly with entrepreneurs and market professionals interested in developing new and innovative investment products in compliance with the federal securities laws.  Recently, Corporation Finance’s Director, Bill Hinman, outlined factors for participants to consider when evaluating whether a digital asset is a security and also named a new Associate Director in Corporation Finance to serve as the Senior Advisor for Digital Assets and Innovation and coordinate efforts in this area across the agency.  SEC staff is also meeting regularly with staff from other regulatory agencies to coordinate efforts and identify any areas where additional regulatory oversight may be needed.  Divisions and offices across the Commission have worked together, as well as with other regulators, to issue public statements regarding ICOs and virtual currencies.

In an effort to further coordinate the Commission’s work on these important issues, in October of this year the SEC announced the formation of a FinHub within the agency.  Staffed by representatives from across the Commission, the FinHub will serve as a public resource for fintech-related issues at the SEC, including matters dealing with distributed ledger technology, automated investment advice, digital marketplace financing and artificial intelligence/machine learning.  In addition to serving as a portal for public engagement, FinHub will also serve as an internal resource within the SEC, coordinating the agency staff’s work on these and other fintech-related issues.  As the work of FinHub and our other activities demonstrate, the agency is focused on issues presented by new technologies, and our door remains open to those who seek to innovate and raise capital in accordance with the law.

Unfortunately, while some market participants have engaged with our staff constructively and in good faith with questions about the application of our federal securities laws, others have sought to prey on investors’ excitement about cryptocurrencies and ICOs to commit fraud or other violations of the federal securities laws.  Enforcement has recently brought a number of landmark cases in this area, and I have asked the Division’s leadership to continue to police these markets vigorously and recommend enforcement actions against those who conduct ICOs or engage in other actions relating to digital assets in violation of the federal securities laws.  The Commission acted swiftly to crack down on allegedly fraudulent activity in this space, particularly where the misconduct has targeted Main Street investors. Regardless of the promise of this technology, those who invest their hard-earned money in opportunities that fall within the scope of the federal securities laws deserve the full protections afforded under those laws.

SEC Looks to Address “Patchwork” of Private Offering Exemptions, Staff to Comment on Accredited Investor Definition

During the 37th annual Government-Business Forum on Small Business Capital Formation, Securities and Exchange Commission (SEC) Chair Jay Clayton opened the event with a couple of interesting statements.

Clayton commented on the byzantine ecosystem that has emerged, over many decades of legislation and rulemaking, for issuers looking to raise capital in private offerings.

While perhaps routine for costly securities attorneys, the alphabet soup of regulatory code creates a jumble of legal speak that might as well be hieroglyphics for a regular person. Nuances are profound and, at times, contradictory.

This current Commission may be doing something about the statutory mishmash.

Clayton stated:

“For exempt offerings, we will be exploring the private offering framework. Our “patchwork” private offering system is complex and it is time to take a critical look to see how it can be improved, harmonized and streamlined.”

If he and his team can get it done, depending on the details, this could be a quite an accomplishment. Simplifying rules should always be a goal but simple does not mean easy. Let’s see what comes out of this initiative as it may dramatically impact online capital formation.

As for the other interesting topic of discussion, once again the definition of an accredited investor is on the docket.

Both the SEC and Congress have been discussing this for years. In fact, there currently exists a bill on Capitol Hill that may fix the current wrong.

The current definition is based on a wealth metric (individually $200k in annual income or $1 million net worth not counting your house). But students of common sense understand that a bank balance is not necessarily a measure of acumen. Most rational folks would like to see a sophistication qualification for individuals interested in investing in private opportunities.

Clayton said the SEC staff is working on a concept release to solicit input about key topics such as the accredited investor definition. The goal is to determine if the definition is “appropriately tailored to address both investment opportunity and investor protection concerns.” I think we already know the answer to that.

Let’s see what the SEC staff produces.

SEC Chair Jay Clayton: No Need to Adjust Securities Laws to Suit Cryptocurrencies

The Chairperson of the SEC, Jay Clayton, spoke about the regulation of cryptocurrencies Thursday evening with reporter and author Andrew Ross Sorkin at a “Times Talk” hosted by The New York Times.

Sorkin began by stating that Clayton may have “the swing vote” regarding the future of this technology.

But Clayton disagreed. “Our job (at the Securities Exchange Commission) is not to vote,” he said. “It is to provide a level playing field and…(ensure) disclosure…We want to be fair arbiters of the market…”

Clayton said that when he was sworn in as Chairperson in March 2017, he was not asked a single question about blockchain or cryptocurrencies, and has essentially been cramming in the car since while his wife drives him around with his giant pile of documents.

Sorkin asked Clayton’s views on comments like Warren Buffet’s, who likened bitcoin to “rat poison squared.”

“My view is that our rules have stood the test of time,” he said. “I’m not going to change (investor protection) rules just to fit a technology.”

Clayton called the men and women who crafted current American securities laws, alluding to the Howey Test, “geniuses”:

“What’s a security?…The folks who came out of the (1939) crash and crafted the rules, those men and women were geniuses…If you offer a token (etc.)…and you are expecting a return for it, that’s a security…and its ripe for fraud…We’ve created a 20 trillion economy based on those rules.”

He repeated sentiment he has expressed previously that Bitcoin does not look like a security because it is, “…so disaggregated…that it looks like a currency.”

To Clayton (and not necessarily the SEC), Bitcoin resembles a security more than a commodity because unlike cocoa, gold, etc., it has no industrial use.

When asked if he, like Christine Lagarde, thinks a nationally-issued cryptocurrency is possible, Clayton said, “I think we’ll see,” adding that staying mum is an important part of his job:

“We all at the commission try not to comment on things that could move markets…I won’t comment on a particualar company or…stock. It’s just not appropriate for me to do so…I just don’t know where it goes…I want try to be fair and clear…(where) we’re not picking winners and losers but we are protecting investors…”

Many times, Clayton reiterated that the SEC’s function is one of investor protection:

“The markets have a lot of sophisticated players and complexities…but in the long term we are running these markets for the retail investor…it is their money that fuels this…”

But in the question period he also said this means not depriving investors of access to innovative companies:

“I worry that investors don’t get exposure to companies until they are very mature…You should just know that that’s on my mind as well.”

Clayton kept the door open as to whether or not other blockchain systems (Ethereum comes to mind but was not mentioned) will eventually be classed as securities:

“What is the permanent use case for anything? That’s how you look at an investment.”

He acknowledged that blockchain-style tech, “…adds efficiencies to the trust issues (in the issuing of securities)…this tech has great promise in that regard…”

…but wasn’t awed by claims that creating a supposedly “decentralized” network for tokens with the features of a security renders them non-securities:

“I expect that over time that distributed ledger technology will become part of the market ecosystem. What I’m not willing to say is, ‘You know what? If you wanna raise money in a public offering, you used to have give people financial statements. You used to have to take responsibility for disclosure, but this technology is so good, we’re gonna get rid of that protection.’ I’m just not going there.”

He also questioned whether a network governed by smart contracts could entirely automate responsibility, as is often envisioned in crypto circles:

“…Our securities laws do produce responsibility…underwriters and accountants (etc. are held responsible)…We almost take it for granted…(But) if you are gonna distribute an ecosystem and say no-one has responsibility…well hey, nothing better go wrong.”

Clayton said there are plenty of securities laws that already apply to crypto, and “many more laws apply” including anti-money laundering laws, but new laws could be created if ICOs were somehow falling through cracks.

Clayton said the various agencies are very cooperative and willing to work together to harmonize their approach, and that he’s totally comfortable calling up the CFTC and others.

Sorkin pressed Clayton on how difficult it has become to do an IPO in the US.

He repeated a quote from James Freeman, founder of Blue Bottle Coffee, who sold his company to Nestle because he didn’t want to go through an IPO and said:

“An IPO seems like a way of living in hell without dying.”

Clayton said he is aware of the problem and of the diminishing number of public companies in the US:

“(Freeman’s) not the only on who feels that way…and the numbers don’t lie. We’ve gone from…8400 publicly traded companies to just over 4000. The size of companies entering the markets is much larger…(There are) multiple contributing factors to this…(that) need to look at…”

He also said, “You probably shouldn’t regulate (small companies) the way you regulate top companies…”

He said that public companies lose advantage when management has to spend too much time on compliance rather than growing the company.

He said he is working on how to “streamline and reduce” the regulatory burden while maintaining investor protections, but also insisted:

“Our securities laws have been so effective that they have grown this economy.”

He then commented on President Trump’s tweeted suggestion that companies should only be required to do semiannual reports, not quarterly. “Markets thirst for those quarterly reports,” he said, which are already backward-looking.

Regarding ICOs, Clayton said, “Many of these ICOs were non-compliant with our securities laws.”

He made clear two ways to do a compliant security:

  1. a private placement
  2. an IPO (obliged to register and do disclosure)

He said the SEC enforcement division has strong prosecutors with, “general direction from me”:

  1. “We need strong deterrents
  2. “I wanna get investors who’ve been wronged their money back
  3. “I want bad actors out of the market.”

“It’s a privilege to work in this industry. If you work in this industry, you make a lot of money. And if you are a bad actor you shouldn’t be there…On those measures I’m extremely satisfied with the prosecutors.”

He also noted that despite strict conditions in the US, “Money returned to investors in ’17 in ’18- the highest years…Now, some of that is the work of my predecessors’ [because] it takes a while and let me give them credit. But that’s a very important metric.”

During the question period, he repeatedly invited entrepreneurs to chat directly with the SEC regarding their compliance questions.

An audience member suggested that tokens move governance to favour stakeholders over shareholders, but Clayton disagreed that tokens are the only way to change that balance:

“There are closely-held companies that much different suites of rights among their shareholders than your typical public corporation…I’m not going guess where this comes out with regards to the age-old principle-agent problem.”

Clayton told Sorkin that exchanges too, must follow relevant laws:

“If you are exchanging securities, you have to register with us or have an exemption. And we recently brought actions to say, ‘You can’t just act like a securities exchange, and not follow our rules.’…”

He said that expectations when trading at offshore exchanges should be that, “..the safeguards are not of the same calibre”:

“I was a patriot before I started this job. I’m even more of a patriot now. Let me throw a stat out. We have 4.4% of the world’s population. We have 52 of the top 100 companies. The standards we set…essentially become adopted by other places. I feel a responsibility to keep that going…”

US rules are used to create standards across the world, he said, and give investors confidence and stability:

“The value of a US compliant offering…private or public…it still has tremendous value…there are a lot of people who do a lot of things to get that good-housekeeping seal of approval.”

Clayton said approving a Bitcoin ETF is a matter of being able to verify pricing, sound custody and being able to enforce:

“(With) an ETF…you’re generally creating a…product for retail investors…They expect good accounting, they expect good custody…and they expect that the price…is a good price…and it’s been set in a way they can be comfortable with.”

He acknowledged that manipulation is a factor:

“Is…the risk of manipulation sufficiently low? It’s not necessarily jurisdictional. It’s how comfortable can we get that the rule set to that trading is enforceable and its good. You know rules are great. You can have the prettiest rules in the world. But you’ve gotta be able to enforce them.”

The final question was from a woman working for a boutique accounting firm that was asked to do accounting for ‘Singularity TV,’ a company billing itself as ‘on the blockchain.’

“What does that mean for us?” she asked.

Sorkin laughed off the question and Clayton said he’d have to ask his wife to drive him around the block again so he can read up on it.

SEC Chair Jay Clayton Comments on Elon Musk & Tesla Enforcement Action and Settlement

“…when companies and corporate insiders make statements, they must act responsibly, including endeavoring to ensure the statements are not false or misleading and do not omit information a reasonable investor would consider important in making an investment decision.”

– Jay Clayton, Chairman of the SEC

Securities and Exchange Commission Chair Jay Clayton has weighed in on the high profile enforcement action against Elon Musk and Tesla Motors (NASDAQ:TSLA).

This past week, it was publicly revealed that the SEC has leveled allegations of securities fraud for a series of false and misleading tweets about a potential transaction to take Tesla private.  Musk, a well known entrepreneur who is worth an estimated $20 billion, had tweeted that funding was secured for a deal that would take Tesla private at $420 per share. Shares in Tesla closed at $264.77 down a whopping 13.9% versus day prior.

On the day of the tweet, shares in Tesla closed at almost $380 a share – near its 52 week high of just over $387 share – clearly reacting to Musk’s very public statement.

Musk added that shareholders could cash in at $420 or hold on for the roller coaster ride of the electric car manufacturer – a company that has captured the attention of the world while struggling to become profitable.

The SEC allegation stated that Musk had “not discussed specific deal terms with any potential financing partners.” This is a huge breach of fiduciary responsibility for any executive of a publicly traded company whether your last name is Musk or not.

Steven Peikin, co-Director of the SEC’s Enforcement Division, said that corporate officers hold positions of trust and have important responsibilities to company owners – including the shareholders beyond Musk’s substantial position in the firm.

“An officer’s celebrity status or reputation as a technological innovator does not give license to take those responsibilities lightly,” Peikin stated.

Stephanie Avakian, the other co-Director of the SEC’s Enforcement Division, added:

“That standard applies with equal force when the communications are made via social media or another non-traditional form.”

By this weekend, Musk and Tesla had smartly settled the SEC fraud charges.

The deal, which is yet to be confirmed, is for Musk to pay a fine of $20 million, Tesla another $20 million, and for Musk to step down as Chairman of the Board but remain as CEO of the company.

Additionally, Tesla will appoint two new independent directors to its board and will establish a new committee of independent directors and put in place additional controls and procedures to oversee Musk’s communications.

While the $20 million fine amounts to little more than a slap on the wrist for the mega rich Musk the changes in management will hopefully reign in Musk’s freewheeling management methods.

SEC Chair Clayton issued a statement on the settlement with Tesla and Musk – something that does not typically occur in a routine enforcement actions. Clayton stated:

“This past Thursday, after the completion of a thorough investigation and following dialogue with representatives of Mr. Musk and Tesla, the Commission filed an action against Mr. Musk in federal district court.  I fully supported the filing of the action.

I also fully support the settlements agreed today and believe that the prompt resolution of this matter on the agreed terms, including the addition of two independent directors to the Tesla board and the other governance enhancements at Tesla, is in the best interests of our markets and our investors, including the shareholders of Tesla.

This matter reaffirms an important principle embodied in our disclosure-based federal securities laws.  Specifically, when companies and corporate insiders make statements, they must act responsibly, including endeavoring to ensure the statements are not false or misleading and do not omit information a reasonable investor would consider important in making an investment decision.”

So who wins in all of this? Tesla shareholders do.

The enforcement action should help compel Tesla and Musk to act in a more professional manner instead of a rich guys playground.

The removal of Musk as Chair, and addition of two new independent board members, will hopefully add some managerial clout to a board that has been negligent in their oversight of the company in the past. Musk recently went on a radio interview where he allegedly smoked marijuana and acted in a bizarre fashion. What did the board of Tesla do? Zippo. Nothing.

In this situation, the SEC Enforcement Division acted appropriately and should be commended in settling this matter as quickly as possible. A lingering lawsuit would be bad for all shareholders. The fine was material but not harmful to the operations of the firm which reportedly has $2.2 billion in cash on hand (even though they are burning through it rapidly).  Settlement means Tesla can move forward with its goal of becoming profitable.

The fact the SEC demanded Musk be removed as Board Chair is an important action and statement. It is the opinion of this writer that the title of CEO and Chairman of the Board should never be shared in a public corporation. There is an implicit conflict of interest when this occurs in listed firms. Boards drive strategy. CEOs execute on agreed upon objectives. Let’s hope Musk, and the Board of Tesla, have both learned a valuable lesson.


Securities Litigations Against Cryptocurrency Projects in US Have Tripled in 2018

Securities litigations against cryptocurrency projects in the US have tripled in 2018, reports, and the SEC under new Chairperson Jay Clayton is leading the charge in 30% of cases.

In “Securities Litigation Report of 2018,” legal analytics firm Lex Machina found 45 cases filed this year against crypto projects in the US, up from 15 cases filed in 2017.

The most active litigant is the firm Levi & Korsinsky, who are presently pursuing 266 securities litigations (conventional and crypto). “They are aggressively expanding their practice in plaintiffs-side securities work,” says Owen Byrd, Chief Evangelist and General Counsel at Lex Machina.

Byrd finds the SEC’s actions against accused crypto fraudsters noteworthy given that SEC Chairperson Clayton was appointed by President Trump, known for pursuing an agenda of deregulation in finance:

“At a very high level, we think it’s an interesting trend because the popular narrative might be that securities enforcement under the new administration, given its deregulatory and other policy positions, might have fallen. We thought it was noteworthy and newsworthy to uncover that filings had increased at the very time when you might think from other signals in the sphere of news that the trend might have gone another way.”

Industry watchers have noted that a lack of clear prohibitive legislation around cryptocurrencies in the US means their legality will likely be sorted in courts, and the SEC has stated publicly that it will pursue any obviously fraudulent crypto projects.

Some lawyers have joked that we should expect a litigation reckoning of sorts  in the next several years, while the window for lawsuits remains open under existing law and precedent.

Defense firms, too, have been establishing themselves in the fray, according to

“New York’s Skadden, Arps, Slate, Meagher & Flom topped the list of defense firms handling securities cases, as well as a separate ranking of those with the most defense wins. Sidley Austin, Latham & Watkins and Gibson, Dunn & Crutcher also made the top 10 of both lists.”

Jay Clayton became head of the SEC in May 2017, and his presence seems to correspond with a change of tone at the SEC generally. SEC actions against accused fraudulent securities issuers have escalated 50% in 2018, up from 1,097 cases filed in 2016 and 1,676 in 2017.

But successful litigants will probably have to share smaller  penalties, says, as awards appear to be trending downwards significantly since 2016:

“According to Lex Machina’s report, penalties obtained by the SEC and the Commodity Futures Trading Commission dropped from $570 million to $412 million. Other securities damages, which include CFTC cases, dropped from $676 million to $364 million.”

Disgorgement in SEC and plaintiffs cases also fell from $3.5 billion to $1.9 billion in 2017 following the 2017 Kokesh v. United States decision, “which limited the SEC’s ability to get disgorgement of profits beyond five years.”

At the time of the Kokesh vs. US decision, Chairperson Clayton said he had a problem with it, “from a practical point of view,” because the judgement would make it harder for the SEC to secure compensation for harmed investors.