The first thing you should know is that I never answer calls that come from No Caller ID. Today, one of those calls came through and, for no particular reason, I answered. As expected, I did not recognize the voice on the other end of the phone. What I didn’t expect is that it was Mark Vilardo from the U.S. Securities and Exchange Commission.
I’m glad I answered.
NOTE: None of this is to be interpreted as advice or guidance of any kind. I’m sharing the general points discussed in my 16-minute conversation with Mr. Vilardo because I know there are members of the blockchain community who will find it interesting or helpful. In the end, Mr. Vilardo’s only actual guidance was to consult legal counsel. My only guidance is to do the same.
It’s an important week at Benja, the adtech company that I started with Tommy Goode in 2014, as we prepare for the launch of Benja’s ICO benjaCoin. We usually work from our respective home cities — San Francisco for me, Austin for Tommy — but given the amount of work that needs to be done in advance of an ICO, we decided to get together. I flew to Austin.
It didn’t take long for our first major hurdle to present itself: right after I landed, the U.S. Securities and Exchange Commission (SEC) released a blog post titled SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities.
We read the 18-page Report of Investigation carefully. We read articles and blog posts about the report. We scrolled through crypto Twitter. We familiarized ourselves with the Howey Test, a test created by the Supreme Court for determining whether certain transactions qualify as “investment contracts.”
After a few hours, I felt confident that benjaCoin would not be considered a security. We felt confident enough to issue a press release, Release: Benja Responds to SEC Initial Coin Offering Investigation. We shared the disclaimers from our white paper which clearly state the purpose and use of benjaCoin.
Still, I wasn’t certain. And when you’re looking at a large sales effort that will represent a fundamental shift in the startup you’ve spent more than three years building, you want to be certain.
I e-mailed our lawyer and followed with another e-mail to SEC Chairman Jay Clayton’s general inbox, email@example.com.
In my e-mail to the SEC, I shared:
- I run a company that is planning an ICO event.
- I’m interested in speaking with someone about our prospective ICO event.
- “Although we are not guaranteeing any ownership rights, dividends, etc. and we explicitly state that our tokens are for simple participation in our network (as an advertiser or publisher), we want to make sure that we are complying…”
I closed by asking whom I should speak with.
I want to raise a point here: my subsequent conversations with members of the community (on Telegram and elsewhere) indicated they felt I had made a mistake by reaching out to the SEC. One person asked why I would “invite the fox to guard the hen house.”
This is an alarming stance and one that I hope the community shakes. Token issuance is an important mechanism that can do wonders for the advancement of blockchain technology, and I believe that the community needs to accept some basic level of legal oversight so that it can realize its full potential.
You know where the speed trap is — don’t blow by it at 200 MPH in your Lambo.
After my e-mail, I waited. We spent our week finding the right partners for benjaCoin’s 8/1 launch, completed the paperwork to be listed on an exchange, and enjoyed some enchiladas at Güero’s.
I wasn’t sure that I would get a response from the SEC. My lawyer said that I shouldn’t expect one since it was such a vague inquiry. (My lawyer also said a lot of other things, but I’m not sharing them— have your own conversations with your own lawyers.)
Today, shortly after 2 PM, I got a call from No Caller ID. It was Mark Vilardo from the SEC.
I had no idea what to expect. The following is an overview of our 16 minute conversation:
Mr. Vilardo first summarized why DAO Tokens caught the attention of the SEC. In my opinion, there was nothing surprising about their interest nor their (confirmed) determination that DAO Tokens are securities under the Securities Act of 1933. Mr. Vilardo’s comments mirrored the views expressed in the SEC report on the investigation.
I shared my understanding, explained our product and offering, and why we believe that we are not a security under the SEC (or any other) definition.
Mr. Vilardo highlighted a few points:
- Each individual ICO or token issuance is different, and the SEC recognizes that not all ICO events or token issuances are securities.
- The Howey Test is the best guidance they can provide. We chatted about how interesting it is 71-year old test can remain relevant in 2017. We also discussed how a test with such a deep and expansive history should offer confidence as its been poked and prodded in every way imaginable.
- It’s important to ask the question of whether there is an expectation of profit by the buyer of a token. If so, there’s trouble.
- The stated purpose and utility of the token is critical.
- Crowdfunding publicly catches the attention of the SEC. Interestingly, a private ICO does not. (Personal note: reading between the lines, I took this to mean that it’s possible that a token like benjaCoin, facilitating advertisement buy/sell activity, could be clear in the eyes of the SEC if the sale were executed to private parties and not out in the open. In practice, this would be a difficult thing to pull off — once the asset is on an exchange, the issuing organization loses most control over the asset. We’re looking into it.)
- It’s important for groups considering an ICO or token issuance to address these questions before offering the asset for sale, not after. (Personal note: this seems like common sense, but the “beg for forgiveness, not ask for permission” spirit appears to be prevalent in the community.)
Mr. Vilardo left me with the best piece of advice that there is in business: consult legal counsel. We have and will continue to do so. He advised that further (specific) questions about compliance should be funneled through their Request Interpretive Advice form in the Corporation Finance section of SEC.gov. That way, he advised, everything will be logged appropriately in their system and they’ll have a record of the exchange. (I personally believe that this is something that all groups considering a token issuance should do, regardless of whether they expect to test the boundaries of what a security is.)
From here, we’re going to work with our lawyers to see if there are specific questions unanswered and, after all have been addressed, we’ll submit a detailed report and statement of why benjaCoin is not a security through their Corporate Finance Submission Form for No-Action, Interpretive and Exemptive Letters. Mr. Vilardo did not advise us to take this action, but we figure that it can’t hurt to clearly state our stance on the record. We’ll make sure that our disclaimers are front and center throughout every step of our token issuance, and — I think — we’ll be launching benjaCoin next week.