The crypto sector faces a pivotal question: how will major regulators, especially America's Securities & Exchange Commission, treat tokens and digital coins? Should the SEC determine that token sales
The crypto sector faces a pivotal question: how will major regulators, especially America's Securities & Exchange Commission, treat tokens and digital coins? Should the SEC determine that token sales all qualify as securities offerings, the largely unregulated period of initial coin offerings would effectively end. Critics worry that strict securities rules might hinder creative development and new business formation in cryptocurrency. That said, we cannot ignore the wave of scams tied to token launches. For ICOs to gain mainstream credibility as a capital-raising tool, investor safeguards must exist. It seems probable that regulatory action will come regardless of the debate's merits—the SEC appears poised to treat numerous token types as securities. Once that happens, companies conducting token sales will require platforms that comply with SEC rules.
At the Consensus 2018 conference, we spoke with two founders of Vertalo, a startup building an SEC-friendly marketplace for token launches. Dave Hendricks serves as Chief Executive and founding partner, while Gautam Gujral heads the legal team. Before Vertalo, Gujral held the position of Senior Legal Counsel within the SEC itself and previously worked as Prime Services Managing Director at Credit Suisse. Both predicted that the SEC would outline formal token guidelines in coming years. Gujral stated: "My guess—and it's an educated guess—is that it's going to take at least a few years for [the SEC to put a regulatory framework in place]. In the meantime, I hope that [the SEC] will take the approach of allowing [some ICOs to continue operating as a means to test the waters]. That's not a completely new approach for the SEC—they've done that before. But I do see it taking a couple of years for [the SEC] to get there, this is not an overnight thing."
Vertalo's mission centers on bringing token fundraising under U.S. securities law. The platform enforces identity verification and anti-money-laundering checks for both token creators and buyers. Token sales through Vertalo will incorporate mandatory holding periods and sale limits based on local rules. Additionally, Vertalo facilitates ongoing dialogue between token issuers and stakeholders, handles investor distributions, and maintains investor records. Several firms pursue similar strategies, yet Vertalo's advantage lies in Gujral's background—his deep knowledge of securities regulations and institutional finance positions him uniquely to navigate the murky legal territory surrounding tokens.
We posed questions about best practices for organizations planning a token sale. Gujral began by quipping, "come talk to us." More substantively, he cautioned that without qualified counsel, companies waste resources during token launches. Hendricks added: "I think the message is 'don't try this at home.' The peculiarities of the law are beyond someone doing it as a side job. If you want to avoid tail risk and reach the maximum addressable market, you need to think about structuring your token offering so that you can work in as many countries as possible. And sometimes that means being maximally compliant. It may slow you down, it may cost a little bit more, but it's also a form of a moat, so think about investing up front so you don't have to defend it later. Focus on your core, leave the non-core stuff to an expert team."
We pressed them on whether token offerings might eventually supplant traditional public share offerings. Gujral noted that token sales will likely grow faster than IPOs specifically in situations where firms operate a service that gains utility from having its own token. He added, however, that companies lacking any token application will continue to use conventional public markets. Hendricks elaborated: "Tokenizing cap tables of venture-funded technology companies and real estate assets are the next big market in this space. There's a tremendous amount of value that's been locked up in companies too small to go public. There's an interesting market that will reveal itself soon for companies that can't afford to go public but can get some liquidity in the form of a token issuance that's done properly."
The path forward remains uncertain, but one thing appears clear: the SEC will almost certainly classify certain token offerings as subject to securities rules. When this materializes, platforms such as Vertalo—offering legal frameworks for token issuances along with sophisticated guidance—will encounter substantial demand.
