The Wall Street Journal recently reported that the SEC has issued dozens of subpoenas and information requests in connection with sales and pre-sales of initial coin offerings. As we have previously noted, the SEC Enforcement Division’s Cyber Unit has been targeting ICOs in recent months, and the SEC has provided a number of public statements raising concerns regarding the ICO and cryptocurrency markets.  It now appears that the SEC’s regulatory efforts in this area may be ramping up.

According to the WSJ, the SEC’s current scrutiny is focused in part on “simple agreements for future tokens,” or SAFTs. SAFTs are one type of offering structure designed to insulate issuers of digital tokens from the risks of non-compliance with the federal securities laws.  A typical SAFT structure will involve the sale of tokens for future delivery, with the sale made at a time when the tokens have either not yet been created or have not yet been issued due to the pre-functional development status of the network. Generally, issuers may treat the SAFT itself as a security, and take steps to structure the SAFT transaction so that it complies with an appropriate registration exemption or safe harbor under the Securities Act (including the filing of a Form D with the SEC in connection with the offering of the SAFT).

Proponents of the SAFT project have argued that the tokens sold pursuant to a SAFT are not securities under the federal securities laws, even if the SAFT itself is a security (although, since the initial SAFT white paper was published, the SEC has more specifically stated its views on when digital tokens will be considered securities). Critics of the SAFT project have argued that bifurcating the purchase of digital tokens through a SAFT may bring additional scrutiny of the transaction, and could, contrary to the purpose of the offering structure, make it more likely that a court would determine that the underlying token is a security. If the WSJ is correct and the SEC is targeting this transaction structure in particular, we may soon get additional clarity.

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Photo of Louis Rambo Louis Rambo

Louis Rambo is a partner in the Corporate Department and a member of the Capital Markets Group. He focuses his practice on counseling public companies and their boards of directors on corporate governance, capital markets transactions, mergers and acquisitions, securities regulation, disclosure and…

Louis Rambo is a partner in the Corporate Department and a member of the Capital Markets Group. He focuses his practice on counseling public companies and their boards of directors on corporate governance, capital markets transactions, mergers and acquisitions, securities regulation, disclosure and shareholder activism. Drawing on his previous tenure with the Securities and Exchange Commission in the Division of Corporation Finance, Louis partners with clients on capital raising, including underwritten equity transactions, at-the-market offerings and high-yield and investment grade debt offerings, as well as on structuring M&A transactions, spin-offs, tender offers and going private transactions. He advises public companies on developing governance and disclosure matters, including director independence, compensation, insider trading issues, shareholder proposals and stockholder meetings, and advises on shareholder activism and takeover defense.

Louis also regularly advises hedge funds, private equity funds, family offices, private companies and other financial institutions on a wide range of transactional and securities regulatory compliance matters, including capital raising, PIPEs and secondary transactions, novel and complex beneficial ownership issues arising under the federal securities laws, derivative transactions, insider trading issues and policies and compliance programs.

Louis previously served as an attorney with the SEC in the Division of Corporation Finance. While at the SEC, Louis worked on a number of transactional and securities compliance matters.