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Crypto Funds

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

SEC Continues It’s Crypto Focus

In the year and a half since Gary Gensler made it clear to the world that he intends to focus on the crypto “wild west” (see HERE) things have gone from bad to worse for the industry.  Of course, it is not all the SEC’s extreme crypto scrutiny that is causing problems, but the very real crypto winter including the collapse of the FTX exchange and its FTX Future Fund, and the realization that the metaverse of tomorrow, will actually not be here until… tomorrow have all added to industry problems.   Not to mention a slew of bankruptcy filings (FTX, Blockfi, Celsius and Voyager) and several other precarious financial positions (Blockchain.com, Coinbase, Crypto.com and Genesis, to name a few).

However, putting aside the crypto industry financial crisis, the U.S. regulators, including the SEC, FINRA and national exchanges, are scrutinizing any business with even a modicum of crypto focus to the point where it is almost impossible to move

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April 18, 2023

The SEC Is Seeking An 8% Budget Increase

On May 17, 2022, SEC Chair Gary Gensler gave testimony before the Subcommittee on Financial Services and General Government U.S. House Appropriations Committee asking for an 8% budget increase for the SEC and outlining his priorities.  Although Chair Gensler expressed a desire to update rules for modern markets and technologies, his main focus is to “ensure that the SEC is adequately resourced so we can remain the cop on the beat.”  As the cyclical nature of the SEC continues, it seems we are moving back towards the era of “broken windows” shepherded in by former Chair Mary Jo White in 2013 and ended in 2017 by former Chair Jay Clayton.

Reminding us of the reach of our capital markets, Gensler points out that the SEC oversees 24 national securities exchanges, 99 alternative trading systems, nine credit rating agencies, seven active registered clearing agencies, five self-regulatory organizations and other external entities. They look after the accounting and auditing functions of

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July 26, 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

SEC Cracking Down on The Crypto Wild West and Other Digital Asset Updates

After a few years of relative dormancy, the SEC is once again targeting the flourishing cryptocurrency market.  On August 3, 2021, SEC Chair Gary Gensler gave a speech to the Aspen Security Forum in which he referred to the cryptocurrency marketplace as the Wild West.  Days later, the SEC filed its first case involving securities using DeFi technology and then a few days after that, reached a $10 million settlement with Poloniex for operating an unregistered digital asset exchange.  Shortly after that, the SEC took aim at Coinbase’s planned crypto lending program causing the crypto giant to shelf the business model for the time being.  SEC Commissioners are joining in, giving speeches in various forums focused on crypto and the regulatory environment.

Background

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

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November 2, 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

SEC And FINRA Joint Statement On Custody Of Digital Assets

On July 8, 2019, the SEC’s Division of Trading and Markets and FINRA’s Office of General Counsel issued a joint statement on broker-dealer custody of digital asset securities (“Joint Statement”).  The SEC and FINRA have been discussing issues of custody related to tokens and digital assets for years.  For example, issues surrounding the custody of digital assets have been continuously cited by the SEC as one of the reasons for the failure to approve a cryptocurrency ETF.

The Joint Statement begins with the admission that historical rules do not adequately cover the complex issues related to digital assets, including rules related to the loss or theft of a security.  In recent months the SEC and FINRA staff have been engaging in conversations with industry participants regarding how the rules could be applied or modified to suit the needs of the emerging technology of digital assets.

Any entity that transacts business in digital asset securities must comply with the federal securities

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August 6, 2019

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