a16z: SEC, Telegram and Regulation 144
Editor's Note: This article comes fromCrypto Valley Live (ID: cryptovalley)Editor's Note: This article comes from
Crypto Valley Live (ID: cryptovalley)
, Author: Scott Kupor, Translation: Zoe Zhou, reproduced by Odaily with authorization.
Many in the crypto community and beyond have been closely watching the U.S. Securities and Exchange Commission’s (SEC) charges against Telegram as another regulatory test for the blockchain space. In October 2019, the U.S. Securities and Exchange Commission claimed in a complaint filed in federal court that Telegram’s sale of approximately 2.9 billion digital currencies (“Grams”) violated the Securities Act of 1933.
But there's an interesting nuance hidden in the SEC's formal complaint, which is really just an outdated reference with potential implications for the entire private equity market. Because the case may call into question nearly 50 years of how law and practice address structuring private equity transactions. Just last week, at the first public hearing in the case, there were signs that the reference could have broader implications for various "investors" and so-called "underwriters." In fact, this distinction may be at the heart of the case.
secondary title
The big issue in this case is whether something originally sold under a "securities" contract is a "securities" after the sale. In this case, the “securities” contract was an agreement to purchase digital currency (a promise to deliver tokens in the future) sold to investors via Telegram prior to network launch. That is, the digital currency that was the basis of the initial investment contract could be traded on the network when the network was launched; continue to exist?
Consider the ongoing discussion about "securities" in the Howey test - not just the label, but the substances that make up the security. After the first hearing last week in the U.S. District Court for the Southern District of New York, a federal judge in the case said he would make a ruling by April 30. However, he also emphasized that the court will not issue an opinion on digital currency or a special case of digital currency, and whether digital currency is essentially a security is not the "focus" of this case. He believes the problem lies in the conditions under which the digital currency is sold and issued.
But the broader concern is whether Telegram did a "financing," which has implications for other industries, including digital currencies.
secondary title
How did that happen?
The most obvious example is the due diligence performed by a VC firm for Company X's Series A financing. The VC enters into a series of legal contracts with Company X that define the rights and limitations of the company and sends money to Company X. Therefore, the company is able to purchase Company X's Series A preferred stock. This is the typical process by which a company sells unregistered securities privately to investors.
Why is this important?
However, what if, at some point in the future, the VC firm wanted to sell its stake in Company X? Under established SEC rules, the firm could sell unregistered securities under Regulation 144 . Under the regulation, restricted and controlled securities can be publicly resold if certain conditions are met. But the statute states that if an investor holds securities for 6-12 months, depending on whether the company reports publicly and whether the investor is an affiliate of the company, the investor is usually free to sell the stock to Another well-run investor can also sell the company on the open market after it goes public.
secondary title
Why is this important?
This is a common law that was born in the 1970s, and this rule has been an important factor in the rise of the venture capital industry, giving birth to many important companies, which in turn created jobs, economic growth...
But the SEC's charges against Telegram appear to ignore this regulation.
Instead, the SEC said in its original lawsuit that the private institutional investors who entered into the Telegram purchase agreement (which was sold privately as securities under the appropriate regulations) did so with the intent of distributing the digital currency to unsuspecting investors. Rather than through an orderly sale to accredited investors who qualify for the pre-application registration exemption required by the SEC Reg.D.
Although many investors have held digital currencies for more than a year (or, according to another common practice, many are able to "retroactive" the holding period to the date of the purchase agreement), we can also assume that the initial purchase of digital currencies was based on misjudgment . According to the SEC, the only way investors can profit from their investments is by selling them to unsuspecting investors.
In a legal sense, what the SEC means is that these investors are effectively “underwriters,” intermediaries who buy Grams with the intent of selling them or their underlying assets to an unwitting public. Not only does this go against the 50-year-old regulation surrounding Rule 144, it also calls into question the nature of the purchase of private securities and the possibility of those securities being resold in private or public markets.
So why should we care? Because if the SEC's interpretation holds, any purchaser of securities in a non-public offering could be considered an underwriter. This has two major effects:
First, traditional underwriters, such as investment banks, may be held legally liable for any material misstatement or misrepresentation made by the issuer of the security. This makes sense under the traditional underwriting model, because underwriters are paid a fee when they market and sell securities—they are responsible for ensuring full and appropriate disclosure to buyers. However, according to the SEC’s interpretation of the Telegram case under Rule 144, any buyer of private securities would now be considered an underwriter. Therefore, it may be liable for the issuer's misconduct. This could mean that a buyer of a security could theoretically sue another buyer for bad behavior by the issuer/seller. This is obviously unreasonable.
