SEC Commissioner proposes safe harbor for projects that raise funds to build decentralized networks
Projects that qualify would get a 3 year window to achieve sufficient decentralization
In a speech in Chicago today, SEC Commissioner Hester Peirce unveiled a proposal to create a regulatory safe harbor for projects that raise funds in order to build decentralized, unowned networks. This is a very sensible approach that would meet the government’s interest in investor protection while giving project developers much needed clarity.
The problem has been well understood. If you raise funds by selling promises of tokens on a decentralized network that you plan to build, that’s pretty clearly a securities offering and you are obliged to comply with the applicable rules. For example, you could take a Regulation D exemption. So far so good, but what happens when you build the network and deliver tokens on it to investors? Are those tokens themselves securities? On the day your network launches is it sufficiently decentralized so that token holders are not relying on your efforts for the network’s functionality and the value of their tokens?
Commissioner Peirce’s proposal addresses this uncertainty elegantly. As long as you follow the rules that apply to the initial fundraising, such as complying with the restrictions of a Regulation D exemption, you will have three years during which the SEC will forebear from applying the registration and trading provisions of the securities laws. That grace period gives otherwise compliant developers time to build a functional, decentralized network and grow participation in it to the point that the network is not reliant on their continued efforts. To qualify for the safe harbor, however, you have to show that you are indeed building an open source, permissionless network and make other relevant disclosures.
This is a win-win-win-win. Developers can fundraise with the knowledge that, as long as they follow the rules, they can legally deliver tokens on a decentralized network. Regulators can be sure that the appropriate disclosures and restrictions are applied in the interest of investor protection, and investors benefit from those disclosures and protections. And perhaps most importantly, the public will benefit from the development of new unowned, permissionless networks—public goods that could now be privately developed more easily.