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SEC Proposes Amendment to Criteria Surrounding ‘Accredited Investors’

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Changing the Rules

In a somewhat surprising and positive move, the Securities and Exchange Commission (SEC) have divulged that they are considering amending existing securities laws.  The purpose of this is to better reflect the modern investor.

In their announcement, the SEC stated,

“The proposed amendments would allow more investors to participate in private offerings by adding new categories of natural persons that may qualify as accredited investors based on their professional knowledge, experience, or certifications.”

Accredited Investor

Being deemed an accredited investor results in a significant amount of doors being opened.  The vast majority of high-potential investing opportunities are geared towards this subset of investors, due to regulatory restrictions.

Unfortunately, the current definition bases one’s eligibility on their income and/or net worth.  This restrictive nature is one reason why crowdfunding platforms, such as WeFunder, have experienced high levels of adoption in recent years.

While still retaining certain financial requirements to become an accredited investor, the new changes will potentially open a lot of doors, as the process places a heavier emphasis on determining if the investor is ‘knowledgeable’.

The following is an excerpt, elaborating on the six amendments brought forth by the SEC for public commentary over the next 60 days.

  • add new categories to the definition that would permit natural persons to qualify as accredited investors based on certain professional certifications and designations, such as a Series 7, 65 or 82 license, or other credentials issued by an accredited educational institution;
  • with respect to investments in a private fund, add a new category based on the person’s status as a “knowledgeable employee” of the fund;
  • add limited liability companies that meet certain conditions, registered investment advisers and rural business investment companies (RBICs) to the current list of entities that may qualify as accredited investors;
  • add a new category for any entity, including Indian tribes, owning “investments,” as defined in Rule 2a51-1(b) under the Investment Company Act, in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered;
  • add “family offices” with at least $5 million in assets under management and their “family clients,” as each term is defined under the Investment Advisers Act; and
  • add the term “spousal equivalent” to the accredited investor definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.

An Industry Plea

This move is one that has been years in the making.  Industry pundits have been stating the need for an updated definition in a vocal way, for a good while now.

As the saying goes, ‘the squeaky wheel gets the grease’.  If enough people speak up, and continue to do so, change will be affected.  This was made evident in 2012, with the passing of the JOBs Act (which paved the way for current day crowdfunding platforms), and it is being made evident again now.

While this move was not made solely with digital securities in mind, the high potential – yet nascent industry – stands to greatly benefit.  Already a niche market, due to its infancy and heavy handed restrictions, such as the existing definition surrounding what is an accredited investor, makes digital securities even more niche.

One of the main areas holding back STOs from mainstream adoption is a simple one – accessibility.  By broadening who is eligible to be an accredited investor, this hurdle will immediately be greatly lowered.

Commentary

Upon filing the proposal, SEC Chairman, Jay Clayton, took the time to share a few words on the move.  He stated,

“The current test for individual accredited investor status takes a binary approach to who does and does not qualify based only a person’s income or net worth…Modernization of this approach is long overdue. The proposal would add additional means for individuals to qualify to participate in our private capital markets based on established, clear measures of financial sophistication. I also am pleased that the proposal specifically recognizes that certain organizations, such as tribal governments, should not be restricted from participating in our private capital markets.”

Many have viewed current definitions as being structured to support the phrase ‘the rich get richer’.  To restrict one’s access to investment opportunities, strictly based on current wealth, is an antiquated way of ensuring investor safety.  The Chairman’s recognition of this, by proposing more knowledge based criteria, is sure to be met with enthusiasm by many.

SEC

The Securities and Exchange Commission (SEC), is a government sanctioned entity.  They are tasked with creating, and enforcing, compliance of rules surrounding the utilization of securities.  The goal of these responsibilities is to ensure that surrounding markets remain safe, fair, and transparent for all participants.

Chairman, Jay Clayton, currently oversees operations at the SEC.

In Other News

In the past, we have reported on various instances of companies requesting that the SEC update their terms and definitions.  These requests have come on various fronts, not just regarding the definition of an accredited investor.  The following article is an example of this, as Templum took the lead earlier this year in requesting clarification.

Templum Implores SEC to Provide Clarification on Security Token Services

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Joshua Stoner is a multi-faceted working professional. He has a great interest in the revolutionary 'blockchain' technology. In addition to this, he is a licenced Paramedic in Nova Scotia, Canada. As such, he can provide emergency care/medicine to any situation necessitating it.

Regulation

KYC/AML – Who is Proactive? Who is Under Fire?

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KYC/AML

AML (anti-money laundering) refers to the laws, regulations, and policies that are used by financial-based institutions to monitor and screen customers’ source of funds, and to ensure that the funds are obtained legally; AML acts as a deterrent for criminals wishing to hide and move illegal money.

A subset under the larger AML umbrella is KYC (know-your-client/customer).  KYC is the collection of data by financial institutions to know its customers better and establish a customer profile that details a customer’s risk tolerance, financial position, and financial literacy.  Documents often collected in the KYC process are notarized passports and utility bills, employment status, net worth, source and description of funds, etc.  KYC is used to protect the financial institution and the customer.

While KYC/AML plays an important role in investing, not all financial institutions are equally thorough in the collection of KYC/AML data.  There have been multiple companies in the digital asset industry that have come under fire for lax approaches to the KYC /AML verification process.  By contrast, there are also multiple instances of companies in the digital asset industry that have taken proactive approaches.

Why are KYC and AML practices important?

While it would be nice to live in a world absent of bad actors, this is simply not reality.  KYC/AML plays a role in creating safe and fair financial markets for everyone.  They also provide a means of recourse against those found to be acting in bad faith.

There are drawbacks in trying to foster fair markets though – notably, a loss of privacy.  Yes, honest investors may gain better safety, but they are also forced to give up vital identifying information about themselves.  This is a valid concern; when giving up personal data, you are entrusting that it will be safely guarded by the receiving entity.  Unfortunately, financial institutions are not immune to data breaches as recently made evident by the Canada Revenue Agency which had a breach of more than 48,500 accounts.

Lax Data-Gathering

Despite the noted benefits of KYC/AML, there are many companies that have opted for a half-hearted approach to these practices.  The following are only two recent examples in a pool of many which highlight this.

Binance Sued

One of the largest cryptocurrency exchanges in the world, one would assume that Binance would partake in good KYC/AML practices. This, however, is not the case in the eyes of Japanese exchange, Zaif.  This lesser-known exchange is now suing Binance over its ‘lax’ KYC/AML practices.  The lawsuit stems around a hack of Zaif in 2018, which resulted in roughly $60M of stolen assets being laundered through Binance – an occurrence that Zaif believes would not have occurred if the KYC/AML procedures used were up to par.

ePayments Shut Down by FINRA

In this instance, payment processor, ePayments, went under a FINRA imposed lockdown in early 2020. While the company has remained quite tight-lipped regarding the reasoning for this, it is known that the lockdown stems from a lax approach to KYC/AML.  In recent days, ePayments has provided a small update, indicating that it is commencing a platform restart soon – albeit with the discontinuation of support for cryptocurrencies – after months of overhauling its KYC/AML approach.

Learning by Example

Although there are those that have not placed enough emphasis on KYC/AML, others have watched and learned from these transgressions.  The following are examples of this, showing both service development, and adoption.

BnkToTheFuture Invests in/Adopts Blockpass

This recent announcement is more than just an investment. BnkToTheFuture will be incorporating a tailor built solution by Blockpass, meant to facilitate comprehensive and efficient KYC/AML procedures.

Securitize makes KYC easy

Industry leading, Securitize, recently launched a new service, dubbed ‘Securitize ID’. This service was built to bring new efficiency to KYC/AML procedures.  It essentially allows for an investor to be ‘whitelisted’ after completing KYC/AML processes through Securitize.  Being whitelisted involves assigning a unique investor ID, which is then recognized by co-operating companies – meaning the process does not need to be repeated countless times.

A Growing Industry

If anything can be derived from these various examples, it is that the world of blockchain needs to take KYC/AML seriously.  While there may not have been services to fit these needs at one point in time, this is no longer the case.  Moving forward, expect to see increased adoption of these services tailor-built for KYC/AML, as companies look to avoid the wrath of regulators, and ensure fair markets for clientele.

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Regulation

Nigerian SEC Provides Clarification on Token Offerings and Digital Asset Classification

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Investors continue to flock towards assets such as cryptocurrencies and digital securities as, not only a new form of currency but a hedge against global economic uncertainty.  As a result, regulatory bodies around the world have had to adapt or clarify approaches towards these alternative asset classes.  The latest to do so is the Nigerian Securities and Exchange Commission.

Before jumping into what a few of these approaches are, the Nigerian SEC took the time to allay fears of an unnecessarily strict approach.

“Digital assets offerings provide alternative investment opportunities for the investing public; it is therefore essential to ensure that these offerings operate in a manner that is consistent with investor protection, the interest of the public, market integrity and transparency. The general objective of regulation is not to hinder technology or stifle innovation, but to create standards that encourage ethical practices that ultimately make for a fair and efficient market.”

Default Classification

In this recent address to the public, the Nigerian SEC was explicit in its approach towards digital assets, stating,

“The position of the Commission is that virtual crypto assets are securities, unless proven otherwise.”

By taking this stance, it removes the guesswork surrounding the treatment of digital assets.  Essentially, it does not matter if an asset fails to fit the definition of a security.  In order to be deemed something else, this needs to be proven to the Nigerian SEC on a case-by-case basis.  Only then, with the approval of the regulatory body, can an asset be reclassified.

Where the Onus Lies

In addition to establishing its position that all digital assets are to be treated as securities by default, the Nigerian SEC elaborated on where the onus lay for those looking to change the classification of an asset.

“…the burden of proving that the crypto assets proposed to be offered are not securities and therefore not under the jurisdiction of the SEC, is placed on the issuer or sponsor of the said assets.”

Essentially, the Nigerian SEC will not be taking it upon itself to classify every asset.  It is the responsibility of a tokens issuer to prove the most appropriate classification.

All Token Offerings Regulated

While the first two points of clarification maintain a focus on investors, a third was made to provide clarity to companies hosting capital generation events.

These events, which include ICOs, DSOs, and IEOs, are all subject to regulation by the Nigerian SEC.  There are no forms or variations that ‘skirt’ around existing regulations.  As all digital assets are deemed securities by default, this classification spills over into events meant to facilitate their sale/distribution.  It is stated,

“…all Digital Assets Token Offering (DATOs), Initial Coin Offerings (ICOs), Security Token ICOs and other Blockchain-based offers of digital assets within Nigeria or by Nigerian issuers or sponsors or foreign issuers targeting Nigerian investors, shall be subject to the regulation of the Commission”

In the ICO boom of 2017, companies around the world took part in these popular means of raising capital.  While many were scams, there were still many well-intentioned companies that simply were not well informed.  As a result, many hosted ICOs, under the impression that securities laws would not apply when this was simply not the case.

This stance by the Nigerian SEC was made in an effort to avoid this confusion moving forward.  While ICOs may not be as popular as they once were, token offerings still regularly occur in the form of DSOs and IEOs.

SEC Nigeria

The Nigerian SEC in its current form was founded in 1979.  Much like similar regulatory bodies, it is tasked with ensuring fair and transparent capital markets through the creation and enforcement of regulations.

Chairman, Olufemi Lijadu, along with a 9 person board, currently oversees operations.

In Other News

At the beginning of today’s look at the actions of the Nigerian SEC, we alluded to similar occurrences in a variety of nations.  Some of these occurrences involved real change, while others simply clarification.  The following are a few examples of these.

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Regulation

FLiK and CoinSpark Orchestrators Charged by SEC for Fraudulent ICOs

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FLiK CoinSpark

On September 11, the SEC announced charges against FliK and CoinSpark, as well as five individuals associated with the two companies.  The charges stem from two fraudulent ICOs (FliK and CoinSpark) held in 2017.

With 2020 being a disaster in many ways, it is easy to develop a short term memory of past years.  Unfortunately for the bad actors that took part in past fraudulent ICOs, the Securities and Exchange Commission (SEC) remembers.

SEC Charges

The charges surrounding these two ICOs are various.  Not only did the events represent the illegal sale and distribution of securities, but they were rife with other fraudulent activity.

  • Illegal sale and distribution of unregistered securities
  • Misrepresentation
  • Appropriating and misusing investor funds
  • Market manipulation

As a result of these charges, all parties have opted for a settlement with the SEC – each of which consists of restrictions on future market participation, along with fines that range from $25,000 – $75,000 USD.

Naming Names

The aforementioned charges are particularly noteworthy, due to the names attached to these projects.  Of the 5 individuals charged, two are well-known celebrities.

Clifford ‘T.I.’ Harris – T.I. is a rapper/actor that not only promoted, and sold FLiK tokens, but also misrepresented himself as a co-owner of the project.

Ryan Felton – Primarily a film producer, Ryan Felton was the main orchestrator behind both illegal securities offerings. The SEC took the time to comment specifically on his actions, stating, “The federal securities laws provide the same protections to investors in digital asset securities as they do to investors in more traditional forms of securities…as alleged in the SEC’s complaint, Felton victimized investors through material misrepresentations, misappropriation of their funds, and manipulative trading.”

Off the Hook?

If there is one individual that may yet rest easy, and be happy with the conclusion of this saga, it would be Kevin Hart.

When the SEC first began investigating the actions of those affiliated with FLIK, Kevin Hart was among those named.  Fortunately for the superstar actor/comedian, recent developments indicate that there have been difficulties proving his involvement.

For the time being, there was no mention of Kevin Hart in the SEC’s most recent communication.

Securities and Exchange Commission (SEC)

Founded in 1934, the SEC is a United States regulatory body.  Its purpose is to foster fair and transparent markets, through the creation and enforcement of regulations pertaining to assets deemed securities.

Chairman, Jay Clayton, currently oversees operations at the SEC.

In Other News

When looking at some of the other high-profile cases to be settled with the SEC, news of FLiK and CoinSpark seems relatively minor.  Despite this, when looking at the big picture it becomes clear that no ICOs are safe from enforcement actions by the SEC.  These smaller cases discussed today are simply the latest in a long line of similar instances.

By not letting anyone ‘off the hook’, the SEC is sending a clear message moving forward that the blockchain industry needs to remain mindful of existing securities regulations, and that companies will be held accountable for their actions.

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