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How to Deal With the SEC's Cryptocurrency Blitz

28 March 2018
The National Law Journal

Mayer Brown’s Matthew Rossi, co-leader of the firm’s securities litigation and enforcement practice in Washington, D.C., talks about how to respond to an SEC subpoena connected to its probe of initial coin offerings and SAFTs.

You’ve probably heard by now about the U.S. Securities and Exchange Commission serving scores of subpoenas on cryptocurrency companies and investors concerning initial coin offerings in the United States. One report says more than 80 such writs, possibly hundreds, have been issued.

The blitz follows a number of pronouncements from the top U.S. securities regulator that many ICOs may be running afoul of U.S. securities laws.

Mayer Brown’s Matthew Rossi, co-leader of the firm’s securities litigation and enforcement practice in Washington, says his firm represents “numerous companies with respect to offerings of cryptocurrency and other crypto assets.” He confirmed in an interview that “a large number” of subpoenas have been served, and that the SEC’s chief, Jay Clayton, gave ample warning that a probe was coming.

“In this case, the [SEC] staff has strongly telegraphed in advance what its areas of concern are and anyone needs to start preparing an answer as to … why what was offered is not a security. The SEC is skeptical of explanations that a token is not a security,” Rossi said. He added: Anyone arguing that tokens aren’t securities had better be gathering evidence to prove it, assuming that the company has neither registered as a security nor fit within a recognized exemption from registration.

Rossi said Clayton also warned lawyers, accountants and other advisers in December that the agency was taking a dim view of professionals giving an “it depends” or “agnostic” position on whether an initial coin offering is a security.

So what to do if you are served with a subpoena? Take it seriously and prepare to respond, Mayer Brown securities lawyers warn.

In a blog post titled “The SEC and Virtual Currency Markets,” published on the Harvard Law School Forum on Corporate Governance and Financial Regulation and on the firm’s own website, the lawyers write about how to respond.

The authors—who include Rossi, co-leader of securities enforcement practice Richard Rosenfeld, and litigation partner Alex Lakatos—point out that the SEC appears to be “looking at ICOs that relied on ‘simple agreements for future tokens’ or ‘SAFTs’ to avoid complying with certain aspects of the federal securities laws. SAFTs have been used for fundraising in several major ICOs, and the question of whether they are a security has not been tested in the courts.”

Rossi advises against fighting these subpoenas, saying that’s “an uphill battle” because the SEC has broad jurisdiction. Instead, he and the other partners who authored the blog advise lining up counsel and contacting SEC staff. He said: “Whether it is an informal request or a subpoena pursuant to a formal order, the first step is to have counsel reach out to the [SEC] staff and try to get a sense of what the motivation of the staff was to issue the subpoena. Typically SEC staff writes subpoenas very broadly, but is often willing to narrow it to something more manageable for the party that is responding, and if more time is needed, that is a good time to raise it and bring it up with the staff. Staff often is willing to accommodate reasonable requests.”

Don’t try to destroy evidence—of course—the Mayer Brown lawyers caution, and don’t try to speak to SEC staff without advice of counsel.

“SEC enforcement attorneys are highly trained interviewers with decades of experience deposing alleged bad actors. Even well-meaning interviewees can inadvertently expose themselves to avoidable legal risk by admitting to a violation that the SEC might not be aware of, ‘admitting’ to a violation they haven’t actually committed, lying about their actions (a crime commonly known as perjury) or creating a misimpression of dishonesty when they are only confused or ill-prepared,” the Mayer Brown blog states.

Rossi warns the SEC is taking the matter of ICOs and SAFTs very seriously. “This is a high priority for the commission and the high priority is making sure that ICOs that involve securities are either registered as required by the securities law, or fall within an exemption from registration; and also that ICOs are not used as a vehicle to perpetrate traditional offering fraud. It is a new technology that can be used to perpetrate the same kind of fraud the SEC has been looking out for since its inception.”

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Reprinted with permission from the March 28, 2018 edition of The National Law Journal © 2018 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

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