Over the last three years, the SEC has focused on applying securities regulatory frameworks to the blockchain and cryptocurrency space. Indeed, we’ve seen several seminal regulatory actions taken by the SEC against blockchain based businesses who’ve launched a token, e.g., the DAO, Munchee, and Tomahawk. As a result, in coordination with the guidance directories the SEC releases regarding ICOs, Cryptocurrencies, and the inherent risk associated with investing in tokens, if follows that industry actors can have key take-aways from these regulatory decisions.
Indeed, its now commonly known that if an entity pursues a utility token release (meaning they do not use a regulatory path), they must avoid discussing exchanges and future profits with potential investors. With that said, even that may not result in a pure utility token, which every project should consider, and its always safer to pursue a regulatory path, e.g., Reg D, S, CF, or A+.
In a somewhat similar vein, while the SEC has not weighed in on the company ShipChain, a blockchain based company that focuses on supply chain management in the shipping industry, the fact that ShipChain received a cease and desist letter from the South Carolina Attorney General around three months ago gives us additional insight into the regulatory uncertainty across state actors in the United States.
In response, ShipChain pushed back claiming that it not only had properly vetted all investors through KYC/AML procedures, but that it had only sold tokens to accredited investors. ShipChain argued a lack of jurisdiction in a two pronged argument: the company maintained throughout the dispute that it did not believe its SHIP tokens were securities, and also said that the cryptocurrency was not marketed to or purchased by any South Carolina residents.
ShipChain chief executive John Monarch repeated these claims, stating that “ShipChain did not conduct a public sale, nor sell to South Carolina residents/businesses, and has no plans to in the foreseeable future.” He added that “Our software development team is in South Carolina and since January we have not been offering, issuing, or selling tokens, and already had no plans to do so for the foreseeable future. Therefore, we are confident that there is no way for this to occur.”
Then, after review, the South Carolina AG rescinded the cease and desist letter. “Earlier today, the Office of the South Carolina Securities Commissioner concluded its inquiry into allegations that it had received against ShipChain regarding its token, and vacated its cease-and-desist order of May 21, 2018. The company fully cooperated with the inquiry. ShipChain is gratified by the Commissioner’s decision and looks forward to continuing to build its transformative global-logistics industry platform and its network of partnerships with the participants in that industry,” ShipChain wrote in a statement.
Indeed, the SC AG stated: “We vacated the cease and desist order because good cause was shown.”
Several factors are inherent in this situation. One may be that regulators are quick to enforce certain traditional regulatory frameworks aimed at providing consumer protection to their citizens. Another is that the SHIP token could in fact be a security, and the SEC has not provided any guidance on this specific project. Overall, this was one of the first times a state agency took action towards a blockchain business before the SEC weighed in on the issue.
However, the cease and desist order was vacated without prejudice, meaning that no decision has been made about whether the SHIP token is a security or not, thus leaving the door open for the SEC to provide insight in the future. However, ShipChain is lauded for its compliance and cooperation, and thus it is most certainly not at the top of the SEC’s “crypto most wanted” list.
Applying this situation, at least at the state level, companies can take solace in the notion that providing transparency and sound business mechanisms can result in a positive outcome for the company. Indeed, it shows that regulators are not simply out to eradicate all actors that may fall in a grey area regarding securities laws. In fact, this gives an example moving forward for those looking to launch compliant tokens in the U.S.