The Regulatory Review
25 December 2018
“Only the rich” benefit from securities regulation in the cryptocurrency space, said CEO Erik Voorhees in a recent tweet.
Voorhees, the head of the cryptocurrency exchange Shapeshift, issued his tweet after messaging startup Telegram’s decision to cancel its initial coin offering (ICO), a new way to raise capital enabled by blockchain technology. According to Voorhees, fear of regulatory scrutiny by the U.S. Securities and Exchange Commission (SEC) drove Telegram to abandon its ICO and opt for private financing instead—taking its capital acquisition out of the purview of securities regulations but also beyond the reach of everyday investors.
Syren Johnstone at the University of Hong Kong Faculty of Law echoes Voorhees’s concern, worrying that companies’ concerns that ICOs will be regulated under traditional securities laws may frustrate those laws’ primary purpose.
According to Johnstone, the big-picture purpose of the Securities Act of 1933—one of the foundations of U.S. securities regulation—is to encourage capital flows away from fraudulent securities offerings and toward “honest business.” But since larger startups such as Telegram can avoid many of the burdens of securities regulation through exemptions that allow them to raise capital through private financial backers, Johnstone worries that only smaller startup companies will make use of public ICOs.
Because everyday investors largely cannot participate in private fundraising, though, they would only be able to invest in smaller companies’ ICOs. “Yet these are the startups that may be statistically more likely to fail,” Johnstone writes. Rather than limiting generally accessible investment opportunities to these risky options, Johnstone would not apply securities regulation to ICOs and instead protect investors by other means.
To Johnstone, incompatibility between ICOs and the design of existing securities law creates a tension between what he argues is the 1933 Act’s purpose—accessible and efficient allocation of capital—and its purported effect of suppressing public access to investment opportunities such as Telegram’s planned ICO... Click here to read the full text.