27 Feb Rule 144 and Token Velocity
There is a fairly strong consensus among some leading venture capitalists arguing for safe harbors for utility tokens. The arguments are very sound and timely, given that the SEC seems to be moving toward regulating utility tokens as securities. Doing so would certainly create major fail-safes for investors but would also greatly restrict the innovation that will inevitably come from developers using coins and tokens to perform crowdsales for their next decentralized venture.
There is an unfortunate paradox in token crowdsales. It can be summed-up simply:
- Token crowdsales promise near perfect liquidity thanks to the ERC-20 token
- Rule 144 precludes investors in private offerings from selling tokens (that are assumed securities in a typical Reg D 506(c) offering or some other exemption) before strict pre-determined dates (in most cases 6 to 12 months)
- Slower token velocity helps to relieve the potential pump-and-dump rampant in initial coin and token offerings.
So, the question is how do we concurrently encourage slow token velocity, which is natural in a crowdsale that assumes a standard regulated environment while at the same time balance with the liquidity promised in a token crowdsale? This is not an easy question. Personally I believe in a balanced approach that somewhat marries the two. In some cases, token velocity is not as much of a factor for the long-term success of a viable token economy within the token being offering. While rare, such a company would spurn the fact that they might have to abide by Rule 144 restrictions on their utility token.
The more pressing current question in everyone’s mind is how can ensure the Howey Test can still apply to utility token sales with an exemption for companies under a particular size?
Forcing every company to assume a token or coin is a security will protect certain investors at the expense of a great deal of innovation. I will be the first to say that regulation is most certainly needed, but the current framework is a square peg in a round hole dilemma.
We need a framework that still protects smaller investors while not shutting them out (e.g. Reg CF), but which could still provide the liquidity promised by token crowdsales without the need for the stringent Rule 144 restrictions. In most cases, we will want a balanced approach to token velocity (likely step-wise over a period and on a smart contract–not as cliff-wise as current Rule 144), a regulatory framework that protects investors (like Reg D or Reg A+), but which still provides for an active secondary market that does not include many of the same restrictions we currently see in private securities offerings.
I am sure the market will figure out a solution which is hopefully a mix of both the current tech and regulation, but that allows for innovation to continue to blossom.