The U.S Securities and Exchange Commission (SEC) is reportedly asking a federal judge to pay no heed to the recent groundbreaking court ruling in favor of Ripple Labs and XRP. According to a new report by Bloomberg, the SEC says that the decision, which was a ruling that Ripple Lab’s automated, open-market sales of XRP […]
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The dYdX Foundation made an abrupt change to its project’s tokenomics, but it may have done so in consultation with its attorneys.
On Jan. 24, the dYdX Foundation, the entity responsible for the dYdX decentralized crypto exchange, announced “changes” to its tokenomics — the way it distributes tokens to early investors, employees and contractors, and, of course, the public.
So, what’s uncommon about the situation? The project’s foundation, in agreement with dYdX Trading Inc. and its early investors, decided to amend the project's tokenomics and extend the period for which such investors’ initial batch of tokens would be locked, changing the date from Feb. 1 to Dec. 1, 2023. Whether this was a good or a bad thing depended on which side of the trade one was on. On the one hand, investors agreeing to hold their tokens for a longer period suggests a vote of confidence on their part in the project’s long-term success. On the other hand, anyone taking a short position in dYdX in anticipation of the increased supply might have been disappointed, as the token’s price rocketed following news of the amendment.
Related: My story of telling the SEC ‘I told you so’ on FTX
But why the delay? Although dYdX is not officially available in the United States, recent victories in enforcement actions on the part of the Securities and Exchange Commission may have prompted a heart-to-heart chat between the foundation and its attorneys. Now, whether the DYDX governance token might ultimately be viewed as a “security” under U.S. law could fill volumes and is outside the scope of this article. What matters is: Why would the signatories to the amendment to the lockup documents consent to a longer lockup? Why not let the tokens unlock and simply hodl them?
In the United States, all offers and sales of “securities” are either registered, exempt or illegal. Specific rules apply not only to the initial offer and sale of securities but also to resales — that is, sales by existing tokenholders to others. As a general matter, one may not serve as a conduit (legally speaking, an “underwriter”) between the issuer of the securities and the general public without following certain rules. Securities received in exempt offerings are referred to as “restricted securities,” and resales of the securities are an illegal “distribution” unless a safe harbor applies.
One such safe harbor is Securities Act Rule 144. One must follow the restrictions of Rule 144 in order to qualify for relief and sell without fear of being deemed an “underwriter.” There are classes of restrictions that apply to different types of holders — specifically, “affiliates” (those who control or are controlled by the issuer) and “non-affiliates.” All sales, affiliate or non-affiliate, are subject to a one-year holding period. This holding period establishes, in theory, that the securities were purchased with “investment intent,” not for immediate dumping on the unsuspecting public.
Sales by affiliates are subject to other restrictions, including that there is “current public information” available about the issuer, limitations on how many securities can be sold in a given period of time, manner of sale restrictions and filing requirements.
Related: Crypto users push back against dYdX promotion requiring face scan
While it is highly unlikely that dYdX insiders long to be subject to the full gamut of United States securities law, perhaps they were inspired by its basic principles, especially if they have short holding periods in the tokens. A common vehicle used by crypto projects to attract early-stage capital, for example, is a “simple agreement for future tokens,” or SAFT. This type of agreement does not convey the tokens immediately but promises to do so in exchange for an up-front investment. As noted above, if you are subject to a holding period on your restricted securities, you must own them in the first place to start the clock running. It is unclear whether the foundation used SAFTs for its investors, but if it did, some of the investors might be new to ownership indeed.
Maybe the dYdX investors who participated in the decision to change its tokenomics wanted to signal their confidence to the market by delaying their access to the tokens. It's possible they anticipated the pump that followed news of the amendment. Or, perhaps they were inspired by U.S. laws and are looking to inch toward eventual compliance with those laws. It will be interesting to see what other measures, if any, dYdX takes with respect to token emissions going forwar.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Cryptocurrency exchange Binance will no longer provide services in the Canadian province of Ontario. The decision comes amid ongoing regulatory pressure on digital asset trading platforms that has already affected the operations of several exchanges. Crypto Exchange Binance Exits Canada’s Ontario Binance, which is one of the world’s leading cryptocurrency exchanges by daily volume, has […]
A former SEC attorney argues that Ripple's Brad Garlinghouse and Chris Larsen are being asked for documents that seem to demonstrate significant overreach.
Powers On... is a new monthly opinion column from Marc Powers, who spent much of his 40-year legal career working with complex securities-related cases in the United States after a stint with the SEC. He is now an Adjunct Professor at Florida International University School of Law, where he teaches a course on 'Blockchain, Crypto and Regulatory Considerations.'
While I was in private law practice for 35 years, after serving for five years in the Securities and Exchange Commission’s Division of Enforcement, I came to learn certain truths. Especially when a company and its officers were subject to SEC or other governmental investigations and enforcement proceedings.
Over time, it was my awareness of these truths that saved many clients untold personal stress and, in many cases, financial ruin and government public actions against them.
The litigation actions by the SEC in the Ripple enforcement proceeding highlight the need for conveying some simple truths regarding the SEC’s habit of overreaching as it pursues certain actions.
When I was with the agency, the Staff in the Division of Enforcement mainly comprised lawyers and investigators trained in finance or formerly employed by brokerage firms and mutual funds. These were SEC “lifers” who, for any number of reasons, clearly planned to make a career in public service and generally had a reasonable approach to enforcement. They had seen the ebb and flow of enforcement priorities in investigations and cases, as well as the types of cases emphasized, depending on the Administration in power at the time. They were unlikely to feel the need to be zealots in their handling of any particular case.
But then, as now, there were also those lawyers that saw the SEC as a stepping stone toward enhancing their future career prospects.
Which brings me to the first immutable truth. As immutable as blockchain technology itself.
The SEC is not your friend. To the extent you provide the SEC the opportunity to roll over you, it will.
Immediate and consistent pushback is necessary to keep the government in check, and reduce the chances of a poor outcome. Let’s look at the SEC’s recent discovery requests in the SEC v. Ripple enforcement case filed last December before Judge Analise Torres of the SDNY, as an example of this strategy.
As most of you probably know, the SEC alleges that from 2013 through 2020 Ripple and its officers have promoted a continuous token offering which should have been registered with the agency. It claims that the token offerings were the sale of “investment contracts”. Ripple and two executives, Bradley Garlinghouse and Christian Larsen, are named as co-defendants in the lawsuit.
According to the SEC they directly violated, and aided the alleged violations by Ripple of the Section 5 registration provisions of the Securities Act of 1933. There are no allegations in the complaint of fraud either under the Securities Act or the anti-fraud provisions of the Securities Exchange Act of 1934.
And according to the Ripple court docket and filings, the SEC has sought the personal financial records from Garlinghouse and Larsen, for the past eight years, from both the defendants themselves and five banks plus the Federal Reserve of New York. This is despite no allegations that either of them had misappropriated any investor funds from the offerings, or committed fraud.
This is clear overreach, and the individual defendants’ response of objecting to this is right and appropriate. (This is regardless of the interesting tidbits set forth in the SEC’s complaint that the defendants had twice sought legal advice on the question of whether XRP was a “security” and were advised in the affirmative, plus that the SEC had previously sued Larsen for registration violations involving another of his companies in 2008.)
Judge Torres, overseeing the case, has referred discovery disputes to a federal court Magistrate Judge; and the individual defendants, through counsel, claim that the personal financial information sought is an invasion of privacy by the SEC, and that no legitimate and reasonable rationale related to the allegations of wrongdoing in the complaint has been articulated. They also note that under the federal statute put in place in the late 1970s to provide certain notice and rights to U.S. citizens from whom personal banking financial information is requested by the Government in its investigations of our citizens, the Right to Financial Privacy Act, courts would never tolerate such an overly broad and intrusive request spanning eight years of information.
The response by the SEC, according to the defendants’ letter of objection to the Magistrate, is that discovery is allowed to be broad in civil litigation. The SEC claims it wants to obtain these records to establish the “motive” of these individual defendants for seeking these token offerings for Ripple.
Nonsense! The defendants are right to push back on this.
Now, while some of you readers may say, “What is the big deal of providing this information, if they have nothing to hide? Or have not done anything wrong?” Well, it IS a big deal. If you give the government an inch, no matter how innocent the inch may seem, you have no assurance the inch will not turn into a foot. Which gets me to what I unabashedly call…
Only do or provide what is reasonable to the Government, since you NEVER know the true motives of the staffer on the other side.
Let me explain. As noted earlier, many government attorneys are selfless public servants and seek to do justice and the right thing. However, there are those in the government who seek to burnish their resume, and to have your client as the next notch in their proverbial belt with a “win at all costs” in the investigation or litigation. Unfortunately, it is not always easy to discern where that SEC attorney stands. Will your professional courtesy or reasonable action on behalf of your client lead to reciprocity? Or will it lead to never-ending requests from an overly aggressive and questionably ethical staffer? Which may lead to some unrelated problem for your client that the SEC was not investigating.
Unfortunately, the maxim that ‘less is more’ has never been truer. The less you offer, the more safe your client can feel. And that is codified in…
Never speak with or testify to the government, unless you can absolutely speak the truth without creating legal exposure for yourself. If you cannot, say NOTHING.
Either decline to be interviewed by either having your attorney make a “proffer” of what you would say, or assert your Fifth Amendment privilege against self-incrimination if subpoenaed to testify. It is much better to force the government to make its own case against your company or start-up, rather than you handing to the Staff the proof on a silver platter. The worse outcome is testifying falsely and giving the government an easy criminal case of perjury regarding false statements to a federal officer, when they may not have been able to make or prove a civil securities case.
Now, there are many nuances to all these points. And each investigation or litigation has its own set of facts and applicable law which has to be considered in how best to interact and proceed in matters involving the government. I also appreciate the school of thought, as advocated by the government, that if you provide “full cooperation” to the SEC or state regulator, or U.S. Attorney, they will be more lenient on you in any charges or penalties.
Well, I have generally found that “full cooperation” only advances your client’s interests if they are essentially ‘caught dead to rights’, with unambiguous documents and third party witnesses available to the government to independently prove the Staff’s case. Too often, however, full cooperation and “playing nice”, doesn’t cut it. In my experience, after seeing many defense and so-called white collar defense lawyers rolling over for the Staff, their clients end up in a worse position.
Which all leads, in true circular fashion, right back to the first immutable truth...
The SEC is not your friend.
Which is why the defense counsel for the Ripple founders is doing what is necessary for their clients… even if the SEC doesn’t think it’s “nice.”
Opinions stated herein do not constitute legal advice.
