You’ve just finished developing your tokens (or other blockchain assets) and are now ready to start selling them. Now what? What securities filings with the Securities and Exchange Commission are required to keep you compliant with the law? Here, we’ll go over a few of the most common securities filings that blockchain startups make.
Regulation A
Many entrepreneurs may be familiar with Regulation D. The filing is fairly straightforward and can be approved online within a day or two. Startups generally prefer this type of securities offering because of how lax it is. If they fundraise only from accredited investors, there are no restrictions on marketing or the amount they are allowed to fundraise. Even if they do fundraise from non-accredited investors, Regulation D still works well for early-stage startups. If the filing is made under Rule 504, the maximum that can be raised in a year from both accredited and non-accredited investors is $10 million, which most early-stage startups would be fine with.
Why doesn’t Regulation D work for blockchain offerings? Well, they tend to be made to wide swaths of the public consisting mostly of non-accredited investors. They also tend to have fundraising targets of over $10 million and require extensive marketing support for online campaigns. This means that none of the rules under Regulation D would apply. What else is available then to blockchain startups? Regulation A is an alternative that better suits their goals.
Regulation A is much more labor-extensive than Regulation D. The filing consists of a document that can be over a hundred pages in length, with detailed disclosures on the business, the management team, the operational strategy, and risks associated with investing in the blockchain asset. Financial audits are required if the business is already up and running. The drafting of this offering statement can take several months, and the approval process can take up to six months or more. But once the filing is completed, startups are allowed to raise up to $75 million from anyone in the general public if they applied under Tier 2, or up to $20 million if they applied under Tier 1.
What are the legal costs of making a Regulation A filing? Smaller law firms charge between $50,000 and $90,000, while larger law firms can charge more than $100,000. Startups should have the financial capacity to take on this legal fee before they commit to a Regulation A offering, as even more costs may come down the road from marketing their blockchain assets.
Regulation CF
Crowdfunding is another way of making blockchain offerings. Regulation CFs filings are much simpler than Regulation A filings. Documents are only between twenty and thirty pages in length, and legal costs are only around one-tenth those typically seen with Regulation A. The approval process is also faster, with less back and forth with examiners in the Securities and Exchange Commission. With that said, there are downsides as well:
- You may need to list your blockchain assets on a funding portal, whereas with Regulation A, you can sell the assets in any way you like
- You may be restricted from selling the assets in certain ways in accordance with the rules of the funding portal
- You may need to share profits with the funding portal
Nonetheless, crowdfunding may be better than Regulation A for startups that are more limited in budget, or for those that are in a rush to sell their blockchain assets as early as possible. You should consider your business strategy and financial resources in deciding which type of securities offering to go with.
In a Nutshell
Startups have several options to choose from when offering their blockchain assets to the public. It’s important to keep in mind that the options aren’t mutually exclusive. In other words, you can file under several regulations simultaneously, if doing so would better serve your business needs. If you are offering multiple types of assets, it can make sense to place different assets under different types of filings, especially if the marketing strategy for the assets are different or if the timelines for rolling them out are different. Securities filings can be costly, so it’s best to come up with a plan for how you intend to reach out to your investors early on.
