Peirce’s safe harbor initiative focuses on one aspect of the crypto-asset industry: a company, trying to build a decentralized network that requires a token to be used to provide access to a function of the network. Crypto startups, for long, have had it hard raising capital without running into conflicts with the securities regulators – the SEC. A workaround was proposed by SEC Commissioner, Hester Peirce.
Peirce has been in news since her dynamic stance in addressing the issue. She has recently re-introduced the updated version of her safe harbor initiatives that allow a three-year grace period by the end of which, the enterprises are required to produce a functional and decentralized application before needing to register with the agency.
The Initial Coin Offering (ICO) allowed companies to raise billions of dollars in capital through the sale of tokens. As per the process, a cryptocurrency startup is required to produce a whitepaper that outlines what the project entails, its objectives, the amount of money required, the number of virtual tokens to be kept by the founders, and the length of time the ICO campaign is to run for.
During the campaign, enthusiasts and supporters in favor of the project buy the tokens using sovereign currency or digital currency. These tokens or coins are of similar nature to shares of a company.
In case the money raised didn’t meet the minimum requirements of the firm, the ICO would be deemed unsuccessful and the collected money would be returned to the initial investors. However, when the capital requirements are met within the stipulated time period, the raised fund may be utilized in the operations of the project.
It is important to note that even when the ICOs do not fall within the scope of Government regulations, the SEC retains the right to intervene.
For instance, the enterprise behind Telegram raised $1.7 billion in an ICO in 2018 and 2019. This was met with SEC filing an emergency action and obtaining a temporary restraining order citing alleged illegal activity the development team engaged in. Again, in March 2020, the U.S. District Court for the Southern District of New York issued a preliminary injunction, and Telegram had to return $1.2 billion to investors and pay a civil penalty of $18.5 million.2
Post its meteoric rise in 2017, it received a backlash from several central banks. The People’s Bank of China banned the ICO claiming those to be counterproductive to the economic and financial stability of the country.
SEC, in the US came down with a stringent Howey Test to determine if the investment was a security or not. Failure at the Howey test resulted in enforcement actions, billions of dollars in penalties, and forfeitures of many enterprises.
Thus the ICO fizzled out in 2018!
SEC Commissioner, Hester Peirce’s Safe Harbor Proposal and Updates
A well-known advocate of cryptocurrency, the US Securities and Exchange Commission (SEC) Commissioner Hester Peirce, came up with her proposal to create a three-year “safe harbor” for the offer and sale of certain crypto tokens provided they meet certain conditions.
Peirce’s safe harbor initiative focuses on one aspect of the crypto-asset industry: a company, trying to build a decentralized network that requires a token to be used to provide access to a function of the network. To create the network, companies distribute the tokens. However, in doing so, their efforts may come under regulations from the federal securities laws.
Commissioner Peirce has recently come up with revisions to her original proposals from 2020. These include:
- Semi-annual updates to the plan of development and a block explorer.
- Exit report at the end of the three-year safe harbor – requiring either an external analysis evaluating to see if it met certain criteria as to network being decentralized or functional or an announcement stating that the tokens will be registered with the SEC.
Peirce is quoted to have had encouraging responses from the Github users; lauded for the novel approach of posting the revision on a popular hosting platform for software. The platform allows feedback and modification through comments.
Doing Away With ‘Regulation By Enforcement
Part of the revised version of Peirce’s Safe Harbor is to lift the ‘regulation by enforcement, which came heavily down on what the regulators identify as ‘wrong-doing’ leaving the rest of the industry wondering what exactly went wrong. Hence it tries to move away from the blurred or vague judgment that penalized the enterprise.
This leaves no room for doubts that the proposal should meet with applause from several quarters as it would open up a wide range of investment opportunities for US retail traders not qualifying as accredited.
If approved this would overwhelm a large batch of prospective investors looking with additional prospects for investment; also calling for thorough research prior to allocation of funds.