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Blockchain Technology

Court Strikes Down Recent Changes To Definition Of A Dealer

In a big win for hedge funds and the crypto industry, on November 21, 2024, a Texas federal judge overturned the recent SEC rule that expanded the definition of “dealer” under the Exchange Act.  For a review of the final rule see HERE.

The amendments were intended to require certain proprietary or principal traders and liquidity providers to register as either a dealer or government securities dealer as applicable.  The rules amended Exchange Act Rules 5a5-4 and 3a44-2 to enhance the definition of “as part of a regular business” in Sections 3(a)(5) and 3(a)(44) of the Exchange Act.

In a legal challenge, the Crypto Freedom Alliance of Texas and Blockchain Association sued the SEC claiming that the rule amendments radically expanded the definition of a “dealer” in a way that could encompass digital asset industry participants (and hedge funds) that do not engage in any conduct resembling “dealing” as that term has ever been

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December 10, 2024

Changes To FINRA’S Corporate Action Notification Process

Effective June 3, 2023, FINRA will be replacing and updating the system for filing a Company Related Action Notification form, which form begins the process with FINRA to effectuate a corporate action initiated by a company trading on OTC Markets.  The new process allows companies to submit forms, get updates and respond to comments through an electronic FINRA gateway.

Background/Rule 6490

Effective September 27, 2010, the SEC approved FINRA Rule 6490 (Processing of Company Related Actions).  Rule 6490 requires that corporations whose securities are trading on the OTC Markets notify FINRA in a timely manner of certain corporate actions, such as dividends, forward or reverse splits, rights or subscription offerings, symbol changes and name changes.  The Rule grants FINRA discretionary power when processing documents related to the announcements.

Rule 6490 works in conjunction with Exchange Act Rule 10b-17. Rule 10b-17 states that “it shall constitute a manipulative or deceptive device or contrivance as used in section 10(b) of

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May 9, 2023

Regulation By Enforcement

The SEC is well known for, and often criticized for, its practice of regulation by enforcement.  In recent years the SEC has been more willing to regulate by enforcement, propounding novel and new interpretations to longstanding rules and regulations.  Market participants have taken notice, and offense.  Advocacy groups have been very vocal against the practice including the Financial Services Institute and Small Public Company Coalition (SPCC).

Although not limited to matters involving cryptocurrencies, blockchain and all things Web3, is the area that garners the most attention for the SEC’s enforcement-based guidance, probably because it is undeniably the topic that is in the most need of actual rule-based regulation.  Starting with the SEC’s 2017 Section 21(a) Report stemming from the enforcement action against the DAO, Slock.it (see HERE), almost all substantive regulatory prescription related to the world of crypto has come from enforcement actions.

Rather than heed the calls for rules and regulations over the years, the SEC has

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March 29, 2022

The BSTX

On January 27, 2022, the SEC approved the country’s 17th stock exchange, the first one of which will utilize blockchain technology.  The new BSTX is a subsidiary of the Boston BOX Exchange and is a joint venture with tZero, which is providing the blockchain technology.  The BSTX is expected to begin operations sometime after June 2022 and will initially only trade securities that first list directly on the BSTX.  Once listed on the BSTX, a security can dual trade on other exchanges.

To begin, the BSTX will trade traditional securities but intends to move into tokenized securities and intends to brand itself with the look and feel of a digital asset exchange as opposed to the more traditional Nasdaq look.  In December 2020, the SEC rejected the Exchange’s original plan to exclusively trade tokenized securities.  The BOX then filed new proposed rules in May 2021 which, after 3 amendments, were approved by the SEC on January 27th.

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March 22, 2022

Non-Fungible Tokens

This one has been on my list for a while and I’m finally ready to dive in – non-fungible tokens (NFTs).  In July 2017, the world of digital assets and cryptocurrency literally became an overnight business sector for corporate and securities lawyers, shifting from the pure technology sector, when the SEC issued its Section 21(a) Report on the DAO investigation finding that a cryptocurrency is, in most cases, a security HERE.  The SEC’s Section 21(a) Report relied on the analysis in SEC v. W.J. Howey Co. to determine when a crypto is a security, building the guardrails to conclude that all, or almost all, cryptocurrencies at that time were/are indeed a security.  For more on the Howey analysis, see HERE.

Later in June 2018, the SEC gave some relief to the crypto world by announcing that Bitcoin and Ether were likely decentralized enough as to no longer be considered a security, hedging on the conclusion as

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March 15, 2022

Digital Asset Securities – Progress For Broker Dealers

In December 2020, the SEC issued a statement and request for comment regarding the custody of digital asset securities by broker-dealers.  The Statement and request for comment sets forth suggestions for complying with the Customer Protection Rule and lists certain requirements that a broker-dealer could comply with to ensure that it would not be subject to an enforcement proceeding for violation of the Customer Protection Rule.

Two months later, in February 2021, the SEC Division of Examinations issued a risk alert focused on digital asset securities.  These statements were the first hitting head on the topic of digital asset custody since an August 2019 joint statement by the SEC and FINRA on the custody of digital assets (see HERE) and October 2019 joint statement by the SEC, FinCEN and the CFTC (see HERE).

The SEC and FINRA have been discussing issues of custody related to tokens and digital assets for years.  For example, issues surrounding the custody

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August 3, 2021

Hester Peirce Proposal For Treatment Of Cryptocurrency

SEC Commissioner Hester M. Peirce, nicknamed “Crypto Mom,” has made a proposal for the temporary deregulation of digital assets to advance innovation and allow for unimpeded decentralization of blockchain networks.   Ms. Peirce made the proposal in a speech on February 6, 2020.

The world of digital assets and cryptocurrency literally became an overnight business sector for corporate and securities lawyers, shifting from the pure technology sector with the SEC’s announcement that a cryptocurrency is a security in its Section 21(a) Report on the DAO investigation. Since then, there has been a multitude of enforcement proceedings, repeated disseminations of new guidance and many speeches by some of the top brass at the SEC, each evolving the regulatory landscape.  Although I wasn’t focused on digital assets before that, upon reading the DAO report, I wasn’t surprised.  It seemed clear to me that the capital raising efforts through cryptocurrencies were investment contracts within the meaning of SEC v.

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March 3, 2020

Division of Enforcement 2019 Annual Report

As my firm does not practice in the enforcement arena, it is not an area I always write about, but this year I found a few trends that are interesting.  In particular, just by following published enforcement matters on the SEC’s website, I’ve noticed a large uptick in actions to suspend the trading in, or otherwise take action against, micro- and small-cap companies, especially delinquent filers.  I’ve also noticed a large uptick of actions against smaller public and private companies that use misleading means to raise capital from retail investors, and the concurrent use of unlicensed broker-dealers.  Of course, there have always been a significant number of actions involving cryptocurrencies. In light of my own observations, I decided to review and report on the SEC’s view of its actions.

As an aside, before discussing the report, I note that the Government Accountability Office (GAO) has raised concerns about the quality of record keeping and documentation maintained by the

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December 24, 2019

The SEC, FinCEN And CFTC Issue A Joint Statement On Digital Assets

On October 11, 2019 the SEC, FinCEN and CFTC issued a joint statement on activities involving digital assets.  Various agencies have been consistently working together, with overlapping jurisdiction, on matters involving digital assets and distributed ledger technology.  Earlier, in August, the SEC and FINRA issued a joint statement on the custody of digital assets, including as it relates to broker-dealers and investment advisors (see HERE).

The purpose of the joint statement is to remind persons engaged in activities involving digital assets of their anti-money laundering and countering the financing of terrorism (AML/CFT) obligations under the Bank Secrecy Act (BSA).  AML/CFT obligations apply to entities that the BSA defines as “financial institutions,” such as futures commission merchants and introducing brokers obligated to register with the CFTC, money services businesses (MSBs) as defined by FinCEN (for more information on MSBs see HERE), and broker-dealers and mutual funds obligated to register

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November 5, 2019

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