In July 2019, the SEC qualified the first token offerings under Regulation A+, approving blockchain startup Blockstack’s bitcoin-like digital tokens on July 10, and live video streaming platform YouNow’s offering of its “Props” tokens on July 11. These decisions will likely serve as new fundraising templates for many blockchain businesses.

Blockstack

Blockstack describes its services as being an open-source decentralized computing platform, whose software libraries enable developers to build decentralized applications, that have no single point of failure or control. The company provides decentralized protocols for authentication, data storage, and software distribution.

According to Blockstack’s filings on EDGAR, it intends to conduct a cash offering under the Regulation A+, Tier 2, framework. Unlike traditional registered IPO filings, this framework allows the sale of Blockstack’s tokens to retail investors as well as to accredited investors and institutions. As part of the offering, an additional supply of tokens is proposed to be allocated to Blockstack’s App Mining Program, which rewards developers who create the top-ranked applications within the Blockstack ecosystem.

YouNow

Following on the heels of the Blockstack qualified offering, on July 11, 2019, the SEC approved YouNow’s “Props” token offering under the Regulation A+, Tier 2 framework. According to its filings on EDGAR, YouNow has created an Ethereum-based blockchain token, which it intends to distribute to those who create content using its app for activities that “drive community engagement” or as a reward for administration of its own blockchain. The Reg A+ offering also includes a secondary distribution of tokens to be distributed by its affiliated foundation for grants to persons developing key apps or otherwise contributing to the development of the network. The company also said that users will begin to receive tokens for engaging with the platform.

Both offerings are significant in that they establish a basic framework for companies that have sought to issue tokens as rewards for specific platform users and developers. In the past, issuers have attempted to structure such tokens to fall outside the Howey test as something other than a security. The Blockstack and YouNow precedents clarify that such attempted structures are unlikely to be acceptable to the SEC in the absence of fact-specific no-action relief. This is not surprising in light of the two recent no-action letters issued by the SEC in TurnKey Jet and Pocketful of Quarters, as highlighted in this newsletter. The SEC draws a clear line between tokens developed for use strictly on a particular platform or “in-app” versus tokens that may be transferred outside the platform or publicly traded on an ATS or other exchange.

The Howey test is based on the U.S. Supreme Court’s landmark case, SEC v. W.J. Howey Co., setting the standard for what arrangement constitutes an investment contract and is therefore regulated as a security.  In the context of blockchain tokens, the Howey test asks if a party has invested funds, in a common enterprise, with the expectation of profits, based on the efforts of a third party.

Click here for the full GT Blockchain & Cryptocurrency Newsletter for Spring/Summer 2019.

Tags: blockchain, blockchain technology, Greenberg Traurig, gtlaw, gt_law, Investment, investment advisers, investors, SEC, securities, securities and exchange commission, security token offering, token offering
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Photo of Barbara A. Jones Barbara A. Jones

Barbara A. Jones is Co-Managing Shareholder of the firm’s Los Angeles office and a member of the firm’s Global Corporate practice. Barbara serves as Chair of the firm’s interdisciplinary Blockchain & Digital Assets practice. Barbara maintains a diverse corporate and securities law practice

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Barbara A. Jones is Co-Managing Shareholder of the firm’s Los Angeles office and a member of the firm’s Global Corporate practice. Barbara serves as Chair of the firm’s interdisciplinary Blockchain & Digital Assets practice. Barbara maintains a diverse corporate and securities law practice across industry groups, emphasizing complex international and domestic transactions, including private and public financings, dual listings, mergers and acquisitions, strategic collaborations and joint ventures, and licensing transactions. She serves as a trusted advisor to public and private company boards of directors on governance matters and complex regulatory reporting and compliance issues. Barbara’s clients include financial institutions, private equity and venture capital groups, and public and private companies in emerging technology, life sciences and biotechnology, defense and security, blockchain and digital assets, telecommunications, information technology, energy (traditional and renewable), mining, media, entertainment and sports. Barbara also represents Olympic and professional athletes and sports-related organizations.

Barbara practiced U.S. law in London from 1990 through 1997 with Sullivan & Cromwell, LLP, and headed the international capital markets practice of Kirkland & Ellis LLP from 1999 to 2003 before relocating to Boston. From 1997 to 1999, she served as Vice-President, Assistant General Counsel and Regional Counsel for capital markets with J.P. Morgan Securities Ltd. in Europe, the Middle East and Africa. Since returning to the U.S., she has continued to actively represent public and private companies, private equity groups and investment banks in the European, Scandinavian, African and greater Asian markets, including China.

Barbara is a past chair of the ABA’s Subcommittee on International Securities Matters. She is a frequent speaker at conferences relating to cross-border securities matters, strategic alternatives, and digital asset structures. She serves on the Government of Bermuda’s Global FinTech Advisory Board.

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Photo of Rebecca G. DiStefano Rebecca G. DiStefano

Rebecca G. DiStefano is a member of the firm’s Global Corporate Practice and Global Securities Practice with deep experience in capital formation matters and securities compliance. She counsels clients in a diverse range of corporate securities, corporate governance and regulatory matters at every

…

Rebecca G. DiStefano is a member of the firm’s Global Corporate Practice and Global Securities Practice with deep experience in capital formation matters and securities compliance. She counsels clients in a diverse range of corporate securities, corporate governance and regulatory matters at every stage of the corporate life cycle from the emerging growth phase to mature companies evaluating exits.

Ms. DiStefano has wide-ranging experience guiding the executive suite at the intersection of capital formation and securities regulatory matters analyzing a range of finance options to help clients pursue their objectives. Ms. DiStefano’s public and private company clients span a variety of industries including real estate, hospitality, financial services, life sciences, energy, manufacturing, fintech and blockchain technology, and resources. She guides firm clients in financing activities such as early seed, angel and venture capital rounds, community investing, liquidity, bridge and growth capital, and including Regulation D Private Placements, Regulation A Qualifications, Regulation CF Crowdfunding, Registrations, as well as attendant continuing disclosure requirements, periodic reporting and corporate governance matters.

Ms. DiStefano’s clients are often private companies preparing to become public companies or planning for a significant growth phase. She regularly represents clients before the Securities and Exchange Commission and state securities agencies. She has served on the firm’s interdisciplinary Blockchain Task Force since 2017.

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