SEC's Peirce Updates Safe Harbor Proposal for Token Sales

Securities and Exchange Commission (SEC) Commissioner Hester Peirce has an updated version of her proposal to let crypto startups sell tokens as initial coin offerings (ICOs) to fund their development efforts without running afoul of U.S. securities laws.

The Token Safe Harbor Proposal 2.0, published Tuesday, updates Peirce’s 2020 proposal, which suggested a three-year grace period that would let blockchain projects actually develop their networks or tokens after raising funds. Under the proposal, a company could sell tokens before building the project but would be exempt from federal requirements that securities issuers register with the SEC.

Tuesday’s version would require companies to provide updates to the SEC every six months and find outside counsel to explain whether their network could be considered “decentralized” at the end of the grace period.

“The safe harbor seeks to provide network developers with a three-year grace period within which, under certain conditions, they can facilitate participation in and the development of a functional or decentralized network, exempted from the registration provisions of the federal securities laws,” the Securities and Exchange Commission (SEC) official said in a public statement introducing the proposal.

If within three years the network was live and met a set of criteria for decentralization, the company would not have to register the tokens as securities or seek an exemption.

Andrew Hinkes, an attorney with Carlton Fields, tweeted the most significant changes include the new “mandatory semi-annual updates” to the development disclosure plan, the requirement that a block explorer be linked in the company’s disclosure and the outside counsel’s reporting requirement and guidance on what that external report should address.

According to the guidance, network decentralization and functionality are treated as two different issues. Decentralization is assessed by voting power, development efforts and network participation, while functionality is assessed by the ability to transmit or store value on the network, as well as run an application on it.

Projects that aren’t decentralized within the grace period must still register as securities issuers, according to the guidance.

“It appears that trading platforms that allow trading of tokens issued under this proposed rule would not be required to be national securities exchanges or alternative trading systems provided that they stop trading the tokens within six months of the issuer's counsel's determination that the network did not reach maturity as provided under the rule,” Hinkes told CoinDesk.

The new proposal omitted a “good faith” provision, alongside a provision that discussed the issuer’s role in facilitating secondary liquidity.

Kristin Smith, the executive director of the Blockchain Association, said the organization “applauds the work of Commissioner Peirce” in addressing the policy issue.

“Her willingness to think thoughtfully about these problems is something to be admired, and we are hopeful that she will be able to work constructively on this proposal with the incoming chairman,” Smith said.

Peirce published her proposal as the Senate voted to close debate on former CFTC Chair Gary Gensler’s nomination to lead the SEC (though Coinbase’s upcoming listing may be the more widely anticipated event this week). The Senate will vote to confirm Gensler on Wednesday.

UPDATE (April 19, 18:57 UTC): Corrects 2019 to 2020.