On July 10, 2019, Blockstack Token LLC (“Blockstack”), a wholly-owned subsidiary of Blockstack PBC, a Delaware public benefit corporation, became the first company to have its Regulation A+ token offering qualified by the U.S. Securities and Exchange Commission (“SEC”).
Blockstack is a technology company that offers an open-source blockchain-based network for developers to build and publish their own decentralized applications. According to Blockstack’s website, over 165 applications have been built on the Blockstack platform. Purchasers of Blockstack’s tokens (“Stacks Tokens”) will be able to use the tokens on its platform.
Token offerings have been under increasing scrutiny, especially with respect to whether or not tokens are securities. In its offering circular disclosure, Blockstack notes that the Stacks Tokens are characterized as investment contracts under the Howey test, though they “will not have the rights traditionally associated with holders of debt instruments, nor…equity.” The disclosure, in its discussion about the nature of its decentralized network, also references the SEC’s recent guidance on determining whether digital assets are securities, “Framework for ‘Investment Contract’ Analysis of Digital Assets”.
Many blockchain-based companies have conducted token offerings under various securities exemptions, including Regulation D, which do not require SEC approval. . One notable difference in Regulation D offerings is that certain types of offerings, including those involving a general solicitation component, such as advertising, must be limited to accredited investors. Blockstack’s approval to offer its tokens under Regulation A+ will allow any retail investor to buy the Stacks Tokens.
Capital Raising Options for Companies Issuing Tokens and Other Blockchain-Based Digital Assets
In the SEC’s 2017 DAO report, the SEC staff noted that generally all token and coin offerings are securities and U.S. securities laws apply when tokens are marketed or sold to U.S. persons, regardless of a token issuer’s location; and therefore, must be registered or exempt from registration. As a result, in order to offer coin or tokens for blockchain and cryptocurrency companies, these companies must either (i) register their securities under the Securities Act of 1933, as amended (“Securities Act”), by filing a registration statement with the SEC or (ii) rely on an exemption from the registration requirements, such as Regulation A+ and Regulation D.
General Requirements Under Regulation A+
Regulation A+ was adopted under the Jumpstart Our Business Startups Act (JOBS Act), which allows issuers to offer to sell equity securities, debt securities, debt convertible or exchangeable into equity or any type of guarantees of such securities. Some of the general features under Regulation A+ include:
- Broad Investor Base. Securities may be offered to both accredited and non-accredited, or retail, investors.
- Immediately Tradable Securities. Unlike other exemptions, such as Regulation D, that has up to a one-year lock up period, securities sold under Regulation A+ are immediately tradeable by non-affiliates of the issuer.
- Promotion of Offering. Companies may engage in public advertising campaigns to market and promote the offering, which is not allowed in a traditional IPO or private placement, so long as any solicitation materials used after filing of the offering statement are preceded or accompanied by a preliminary offering circular or contain a notice about how to obtain the offering circular.
- Secondary Sales. Sales of securities by selling security holders within the 12-month period after the initial offering cannot represent more than 30% of the aggregate offering price.
- Only U.S. or Canadian Investors. Investors must have their primary place of business in the United States or Canada;
- Ineligible Issuers. Ineligible issuers include, but are not limited to those (i) required to be registered under the Investment Company Act of 1940 and business development companies; (ii) blank check companies; (iii) issuing fractional undivided interests in oil, gas, mineral or similar rights; (iv) subject to “bad actor” disqualification under Rule 262 of Regulation A+.
- Registered Transfer Agent. The SEC requires that issuers conducting Tier II offerings must engage a stock transfer agent under Section 17A of the Exchange Act, unless exempt. Note that Blockstack has disclosed that it is taking the position that Blockstack, the miners on the network, and the network’s blockchain are not required to register as transfer agents.
Specific Requirements Under Regulation A+
There are also specific requirements for issuers electing to take advantage of either Tier 1 or Tier 2, which is more widely used, under Regulation A+, some of which are included below.
|Total Maximum Offering Amount in any 12-month Period||$20 million||$50 million|
|Maximum Offering Amount to Affiliates of Issuer (Such as Insiders)||$6 million||$15 million|
|Initial Reporting Obligations||
|Post-Offering Reporting Obligations||Form 1-Z (exit report filed 30 days after the termination or completion of the offering)||
|Investor Qualifications||None||With the exception of securities that will be listed on a national securities exchange upon qualification, purchasers must either be (i) accredited investors (as defined in Rule 501(a) of Regulation D), or (i) be subject to certain limitations on their investment, including their purchase of securities can be no more than (x) 10% of the greater of annual income or net worth (for natural persons) or (y) 10% of the greater of annual revenue or net assets at fiscal year-end (for non-natural persons)|
|Investor Limit||2,000 pursuant to Section 12(g) of the Exchange Act||None, as long as current in Regulation A+ reporting obligations.|
Filing Process and Regulatory Requirements
The process of filing for a Regulation A+ offering takes at least 60 days. Companies who wish to use Regulation A+ as their path for an initial coin offering (ICO) or a securities token offering (STO) must first file a Form 1-A with the SEC. This Form 1-A includes a (i) notification of filing, (ii) an offering circular, which is more detailed than the traditional white paper created by blockchain companies and (iii) exhibits. The information includes, among other things, certain issuer information, balance sheets and related financial statements, risk factors, a business plan, plan of distribution, and Management’s Discussion & Analysis of Financial Condition and Results of Operations. The offering statements must be qualified by the SEC before any sales of securities may be made. However, Regulation A+ does permit certain “testing the water” activities to gauge investor interest, before or after the filing of a Form 1-A, subject to certain legending and filing requirements.
Non-public submission of offering statements for review by the SEC before public filing is also permitted, but the statements must be publicly filed no less than 21 days before SEC qualification.
Potential issuers should be aware that additional regulatory requirements apply to these offerings, including anti-money laundering (“AML”) checks and investor verification, background checks on the principals of the issuer and disqualifications of “bad actors.”
Although there is no one-size-fits-all approach, the amendments to Form 1-A filings may offer insight on the SEC’s areas of focus in offering circulars to companies considering a digital asset or token offering under Regulation A+. In addition to the traditional information, such as an overview of the business, its operations and use of proceeds, some areas highlighted in amendments as a result of revisions prompted by SEC review include, but are not limited to:
- Disclosure related to the terms of the tokens under smart contracts and that the tokens are expressly securities;
- Disclosure related to liquidity and any secondary markets for sale and purchase of tokens, alternative trading systems and the clearing and settlement processes;
- Risk disclosure related to (i) potential delays and the amount of time it will take for an issuer to deliver securities under Regulation A+ offerings for investors who subscribe to such securities; (ii) the effect of subscription agreements that have been offered; (iii) the tokens, the blockchain platform, service providers and the offering; and (iv) protection of intellectual property;
- Investment process disclosure related to AML checks and investor verification; and
- Financial statement revisions.
Certain Liability Issues
Issuers should be aware of the other federal securities laws that are applicable to offerings under Regulation A+ that create certain potential liabilities, including:
- under Section 12(a)(2) of the Securities Act for material misstatements or omissions in an issuer’s offering circular or in any oral communications;
- anti-fraud liability;
- insider trading; and
- market manipulation.
There is not a generally accepted industry method for valuing digital securities, unlike traditional debt and equity securities; therefore, pricing of tokens may be uncertain and affected by additional factors, such as a token’s blockchain platform, expectations of future demand and usage of the platform, among other things.
Investors should be aware that a shell company is not disqualified from filing under Regulation A+, as there is no requirement that an issuer be an operating company. Therefore, companies offering tokens may not be operational. However, development stage companies with no specific business plan or purpose are prohibited from relying on Regulation A+.
Although Blockstack’s is the first Regulation A+ ICO to be qualified, there is potential for other blockchain-based companies to use Regulation A+ as a viable capital-raising tool. If companies are able to have their ICOs qualified under Regulation A+, the secondary trading of such companies’ securities on alternative trading systems (ATSs) is likely to increase and be available much faster due to the non-restricted trading nature of securities initially offered under Regulation A+. In addition, many retail investors looking to participate in token offerings may have more opportunities to invest in the future under the changing Regulation A+ regime.
Until recently, many companies attempting to offer tokens under Regulation A+ have had inadequate or incomplete disclosure that has prevented SEC qualification. Now that the SEC has allowed public companies to use Regulation A+ as a means for capital raising and many blockchain-based companies are increasingly better capitalized to support the accounting, legal and financial costs and robust disclosure that Regulation A+ calls for, we may increasingly see Regulation A+ as a key method of issuance for blockchain-based offerings.
While the qualification of the Blockstack offering may encourage capital raising for blockchain-based companies looking to conduct token offerings in a regulated form, the costs incurred (approximately $2 million) and the time spent (over one year) for Blockstack to achieve qualification of its offering highlights that Regulation A+ may still not be the easiest and most efficient way for the majority of startup companies to raise capital. In those situations, companies should continue to explore other exemptions from registration, including Regulation D (private placement offerings), Regulation S (offerings to non-U.S. investors) and Regulation CrowdFunding (offerings of up to $1.07 million through crowd funding).
 See SEC v. W.J. Howey Co., 328 U.S. 293 (1946).
 SEC’s Framework for “Investment Contract” Analysis of Digital Assets (Apr. 3, 2019), available at https://www.sec.gov/files/dlt-framework.pdf.
 17 C.F.R. §230.257
 An issuer of $20 million or less of securities could elect to proceed under either Tier 1 or Tier 2.