In granting the SEC’s motion for summary judgment, a federal court ruled that sales of LBC tokens were securities transactions.

By Stephen P. WinkDouglas K. Yatter, Jack McNeily, Benjamin Naftalis, Adam Zuckerman, and Deric Behar

On November 7, 2022, the Securities and Exchange Commission (SEC) prevailed in a motion for summary judgment against blockchain-based streaming and publishing firm LBRY, Inc. The US District Court for the District of New Hampshire (the Court) considered the

SEC Commissioner Peirce has revived and refreshed her proposed three-year safe harbor for qualifying token projects, but some unresolved ambiguities remain.

By Miles P. Jennings, Stephen P. Wink, Naim Culhaci, and Deric Behar

US Securities and Exchange Commission (SEC) Commissioner Hester Peirce, a longtime and vocal advocate for innovation in financial services, has not shied away from engaging with and supporting the fledgling digital asset ecosystem. One of the milestones along this path has been the unveiling of her Token Safe Harbor Proposal on February 6, 2020, in a speech at the International Blockchain Congress. (See Taking the Scarlet Out of the Letters I-C-O.) Now, following up on a promise to refresh the proposal in light of feedback received in the past year from “the crypto community, securities lawyers, and members of the public,” Commissioner Peirce has published Token Safe Harbor Proposal 2.0 (Proposal 2.0).

SEC Commissioner Peirce has proposed a three-year safe harbor for qualifying token projects, but regulatory clarity remains elusive.

By Stephen P. Wink, Carolina Bernal, Shaun Musuka, and Deric Behar

SEC Commissioner Hester Peirce has been a perennial advocate of innovation in the financial services and digital asset space. Continuing that tradition, she unveiled a Token Safe Harbor Proposal in a speech at the International Blockchain Congress on February 6, 2020. The proposal would allow for a time-limited exemption for token-based projects that seek to raise capital to develop decentralized networks. The exemption would permit fledgling networks to operate unburdened by the onerous registration provisions of the US federal securities laws.

Provided that certain standards and disclosure requirements were met, the three-year grace period would ostensibly allow token developers to pursue “sufficient” decentralization of their network from the time of first token sale, such that purchasers of the token would no longer reasonably expect that that token value was being driven by a person or group via managerial or entrepreneurial efforts. Sufficient decentralization has become the holy grail of initial coin offerings (ICOs) ever since the SEC’s Strategic Hub for Innovation and Financial Technology released a framework for assessing whether a blockchain-issued token or digital asset constitutes an investment contract (i.e., security) under the Howey test. (See New SEC Token Guidance: This Is Howey Do It and Crypto — The Pursuit of Sufficient Decentralization.)

The FCA is considering whether alternative data could introduce new risks to market integrity.

By Rob Moulton, Fiona Maclean, Stuart Davis, and Charlotte Collins

The FCA’s recently published Insight article explores how alternative data might give rise to market abuse risks. The article reports a significant increase in spending on alternative data in recent years, leading to questions about whether access to such data might provide recipients of the data with an unfair informational advantage over other market participants.

While traditional sources of data, such as a company’s financial statements, may contain inside information and must be treated appropriately before they are made public, the nature of alternative data is less clear-cut. Alternative data does not come from the company itself, and may derive from (or be extrapolated from) a number of sources. Alternative data may allow those with access to know things about a company that others in the market do not know, or that the company itself does not know. This may be the case, even if, as is frequently the case, the pool of structured/unstructured data used by the analytics engine is in the public domain. Evidently, this could provide trading opportunities that put the holder of such information at an advantage, as compared with other market participants.

A key example of where alternative data has raised concerns recently is in relation to so-called “secret polling”. The government has had exchanges with the FCA concerning the potential use of private polling data to obtain a trading advantage in advance of election results. The regulator’s view is that, while the Market Abuse Regulation (MAR) might be engaged by such activities, MAR would only apply if the underlying information were to constitute inside information. This is unlikely to be the case, unless the information met the MAR recital 28 test of information “routinely expected by the market” to be published, such as weekly BBC opinion polls. Therefore, MAR does not restrict the sharing of polling information that is not inside information. However, this position clearly raises political questions of fairness, as those able to pay for and access the data may well gain an advantage in the market, and those providing the data may not understand the use to which it will be put.

SEC issues cease-and-desist orders for unregistered token presales and anti-touting violations.

By Stephen P. Wink, Cameron R. Kates, Shaun Musuka, and Deric Behar

Not content to let the dog days of summer slip by, the US Securities and Exchange Commission (SEC) recently issued two cease-and-desist orders relating to the offer, sale, and marketing of cryptocurrencies.

SimplyVital – Simply Saying a Sale Is Exempt Will Not Suffice

In the first order (SV Order), the SEC concluded that SimplyVital Health, Inc. (SimplyVital), a “health care-related blockchain ecosystem” start-up, violated the Securities Act of 1933 (Securities Act) by failing to register an initial coin offering (ICO) presale.

By Andrew Moyle and Stuart Davis

Growth in applications for blockchain and tokenisation, combined with an increasing number of initial coin offerings (ICOs), mean that buyout firms should note developments in this sector.

Why Should PE Be Interested in Blockchain?

A shared blockchain ledger could drive a single interface between a PE fund and its investors, increasing transparency and efficiency, providing real-time updates for LPs on investments, and enhanced investment analytics.