An ICO made in reliance on the safe harbor would have to comply with certain disclosure requirements.
Hester Peirce, an SEC regulator dubbed “CryptoMom,” has floated the idea of offering a ‘safe harbor’ to ICOs so that some crypto tokens are not treated as securities. The relief, however, would be time-limited to guard against reliance on the safe harbor by ICO promoters without a workable plan to build operational networks.
In remarks made at the International Blockchain Congress in Chicago, Peirce proposed a three-year grace period for cryptocurrency startups to tweak their token-based fundraising models in new directions. As the name implies, crypto tokens meeting specified criteria could be issued more freely before the SEC determine whether they need to comply with the federal securities laws.
All in all, the non-exclusive proposal would exempt blockchain developers from certain licensing and registration requirements applied to other financial brokers, whereby new token offerings can be made under an alternative regime with more robust framework. Hence these tokens, which would otherwise be classified as securities, would not have the usual regulations applied for enforcement purposes. Still, there are no conclusive rules on how to de-securitize a particular token at the end of the three-year grace term.
An ICO made in reliance on the safe harbor would have to comply with certain disclosure requirements. For example, any offering must provide clear details about the source code and token functionality, including the mechanisms for changing holders’ rights and explaining how funds are to be used—before the issuer could qualify for this exemption.
The relevant disclosures would also include information about what Peirce calls “an initial development team,” which would supervise the project lifecycle until it reaches the “network maturity.”
“The definition of Network Maturity is intended to provide clarity as to when a token transaction should no longer be considered a security transaction but, as always, the analysis will require an evaluation of the particular facts and circumstances,” said the proposal.