In a recent article, SEC Commissioner
Background
The reach of decentralized finance (
Initially popularized by the digital currency Bitcoin, blockchain technology and the
The expansion and evolution of
In pronouncements that followed, the
Enter Commissioner Crenshaw
Commissioner Crenshaw's article in the inaugural issue of
In particular, Crenshaw stressed the need to provide clear and specific disclosure of
Acknowledging the continuing uncertainty around
But Crenshaw notes that enforcement is not the preferred approach, adding that "[t]he more projects that voluntarily comply with regulations, the less frequently the
Notably, Crenshaw's article closely follows the
Available exemptions include private placements to accredited investors under Regulation D of the Securities Act and foreign offerings to overseas investors under Regulation S. The respondents in the
Key Takeaways
DeFi Products May Be Securities . Through its prior reports and pronouncements and most recently in Commissioner Crenshaw's article, theSEC and individual commissioners have made clear thatDeFi products and services are viewed through the lens of existing securities laws. Those that meet the decades-old test for identifying investment contracts (the so-called Howey Test) are particularly likely to be regulated.- Future Participants Should Proceed With Caution. The
SEC's message has been consistent and clear: ForDeFi products that are securities, registration with theSEC is required unless an exemption is available, such as in private placements to accredited investors under Regulation D and foreign offerings to overseas investors under Regulation S. Experienced legal counsel should be consulted before proceeding to market to ensure any potential offering is properly registered or exempt from registration. - Voluntary Compliance Will Be Viewed Favorably. When in doubt,
DeFi market participants should err on the side of voluntary compliance, including by providing clear and specific disclosure of the risks associated with their products. While disclosure alone does not ensure full compliance with applicable regulations, transparency is a bedrock principle ofU.S. securities laws, and Commissioner Crenshaw's writing makes clear that taking such steps may reduce the likelihood of an enforcement action. - The Penalties for Violations Can Be Substantial. Promoters of unregistered securities face substantial civil and criminal liability. The indirect consequences of an enforcement action are also significant. Violators will find it difficult to establish banking relationships, obtain regulatory licenses and raise conventional capital.
- Remedial Action May Be Advisable. Those who have already proceeded to market with
DeFi products should consider whether they have already violated any securities laws and, if they have, take remedial action. Similarly, trading platforms, intermediaries and other service providers that have previously handledDeFi products should consider whether they also have disclosure or registration obligations. - Other Securities Laws May Apply. Commissioner Crenshaw's article does not directly address whether
DeFi market participants are "investment companies" for purposes of the Investment Company Act of 1940 or "investment advisers" for purposes of the Investment Advisers Act of 1940; both acts generally require that such entities register with theSEC . Given the broad definition of "securities" under these acts, however, members of theDeFi community should carefully consider the applicability of these laws to their activities.
Related Links
Crenshaw, Caroline A., "DeFi Risks, Regulations, and Opportunities,"
Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO, Exchange Act Release No. 81207 (
Order Instituting Cease-and-Desist Proceedings, Administrative Proceeding File No. 3-20453 (
Footnote
1. Consistent with Commission policy, Commissioner Crenshaw expresses only her own views, and as such are not official
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Mr
NY 10036
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