Blog

By Michael W. Zarlenga, Esq.*

On February 15th, I flew into Dallas Fort Worth Airport to attend the Bitcoin, Ethereum & Blockchain Superconference at the DFW Marriott.  Over two days, there were a series of speakers and break out discussions on everything from investing in cryptocurrencies to the current state of regulation.  

The conference opened with remarks from Tim Draper, a venture capitalist and visionary whose VC funds have invested in start-ups like Skype, Hotmail, Tesla, Baidu, Theranos, Athenahealth, Solar City, Box, TwitchTV, SpaceX, Cruise Automation and Parametric Technology.  He is credited with coining the phrase "viral marketing".  Earlier in my career, I was responsible for doing much of the fund formation work for VC fund Draper Fisher Jurvetson and some of its affiliate funds, such as Draper Atlantic, so I am very attune to the insights of Tim Draper.  One comment, or rather prediction, caught my interest, and summed up why many of the people attended the conference. The morning of Friday, February 16, 2018, Tim predicted that if you walk into a Starbucks Coffee five years from now and tried to pay with cash, the Barista will laugh at you.

As an attorney, I also had an interest in learning the latest thoughts of others in my profession and the executives of the major players in the industry. I was especially interested in coin and token offerings.  As I have been espousing for months, the industry finally seems to be coming to grips with the fact that most coin and token offerings in the United States or to a U.S. citizen are going to be regulated by the Securities and Exchange Commission as an offering of a security. The path for a purely utility token has become extremely narrow.

On the cryptocurrency front, the speakers tended to stress that the Anti-Money Laundering and Know Your Customer (AML-KYC) rules are often being overlooked. Additionally, rules regulating money or currency exchanges and money transfer businesses are also taking a back seat. Yet, on an individual basis, these rules are the traps for the unwary.

After talking with many of attendees, my biggest takeaway was that the blockchain and cryptocurrency space has reached the point at which regulators are no longer willing to overlook bad actors. Regulators are expecting people to comply with the law and are no longer going to just give out slaps on the wrist. Having quality legal counsel familiar with the issues will be key moving forward. Bergstrom Attorneys continues to monitor developments and advise clients in the cryptocurrency, coin and token offering, and distributed ledger network arena.  Contact us to discuss how we can help achieve your goals.

* Michael W. Zarlenga is Of Counsel to Bergstrom Attorneys, PLLC.  Mr. Zarlenga has extensive securities law experience, including both public and private placements of securities totaling in excess of $2 billion.  In addition, Mr. Zarlenga has advised clients ranging in size from start-up companies to Fortune 500 in such diversely regulated fields as biotech, hi-tech, financial services, and insurance.    

By:  Michael W. Zarlenga*

On December 11, 2017, the Securities and Exchange Commission (SEC) made public three important documents related to ICOs and cryptocurrency ecosystems.  The first was the public release of an order instituting a cease-and-desist proceeding against Munchees, Inc., a restaurant review iPhone application.  Munchees, Inc. engaged in an ICO of MUN, coins which closely resembled utility tokens.  However, using the U.S. Supreme Court’s analysis in SEC v. W.J. Howey Co., the SEC classified the MUN as investment contracts.  As the SEC discussed in The DAO Report, tokens, coins, or other digital assets issued on a Blockchain may be securities under Federal law.  If they are securities, issuers and others who offer or sell them in the United States must register the offering and sale with the SEC or qualify for an exemption from registration.  Quoting two other U.S. Supreme Court Cases, United Housing Found., Inc. v. Forman and Tcherepnin v. Knight, the SEC noted that “In analyzing whether something is a security, form should be disregarded for substance, and the emphasis should be on economic realities underlying a transaction, and not on the name appended thereto.  In other words, calling something a Utility Token does not make it so in the eyes of the SEC or the Federal securities laws.

The second issuance by the SEC was a longer statement on cryptocurrencies and ICOs.  It was a statement from SEC Chairman Jay Clayton.  Chairman Clayton stated:  “A key question for all ICO market participants: ‘Is the coin or token a security?’ As securities law practitioners know well, the answer depends on the facts.”  Chairman Clayton went on to provide an example of the difference:

For example, a token that represents a participation interest in a book-of-the-month club may not implicate our securities laws, and may well be an efficient way for the club’s operators to fund the future acquisition of books and facilitate the distribution of those books to token holders.  In contrast, many token offerings appear to have gone beyond this construct and are more analogous to interests in a yet-to-be-built publishing house with the authors, books and distribution networks all to come.  It is especially troubling when the promoters of these offerings emphasize the secondary market trading potential of these tokens. Prospective purchasers are being sold on the potential for tokens to increase in value – with the ability to lock in those increases by reselling the tokens on a secondary market – or to otherwise profit from the tokens based on the efforts of others.  These are key hallmarks of a security and a securities offering.”

As with the Muchees, Inc. cease-and-desist order, the example points out that the fact that if a token is going to increase in value based on the future efforts of others, it is most likely a security.  This position should not be surprising given the SEC’s position that a SAFT (Simple Agreement for Future Tokens) is an investment contract and therefore, a security.

The final public release by the SEC is a transcript of a speech last week by Dalia Blass, the Director of the SEC’s Division of Investment Management.  While Ms. Blass spent very little of her speech on cryptocurrencies, Ms. Blass did note the following:

We also continue to think about new innovations in asset management.  For example, we have seen several filings for registered funds that would hold cryptocurrency.  As with any new product, there are questions to ask.  For example, would retail investors have sufficient information to consider these products and to understand the risks? . . .  When thinking about cryptocurrencies and other blockchain offerings as fund assets, are differences in their features important?  How would these funds fit into the existing regulatory scheme?  What regulatory structure or structures apply to the market for the underlying instrument?  We will be discussing these questions with you as we work through these filings.

Is this a foreshadowing that the SEC is looking to regulate the secondary markets for utility tokens or coins?

As with other Federal and state agencies, the SEC is very interested in the topics of cryptocurrencies and other Blockchain assets.  The future regulatory landscape is anything but clear.  Bergstrom Attorneys continues to monitor developments and advise clients in the cryptocurrency and distributed ledger network arena.  Let us know if we can help you.

* Michael W. Zarlenga is Of Counsel to Bergstrom Attorneys, PLLC.  Mr. Zarlenga has extensive securities law experience, including both public and private placements of securities totaling in excess of $2 billion.  In addition, Mr. Zarlenga has advised clients ranging in size from start-up companies to Fortune 500 in such diversely regulated fields as biotech, hi-tech, financial services, and insurance.

If prepared by a skilled practitioner, a prenuptial agreement can open the door to a long-lasting and honest marriage.

Engaged couples seeking to establish and encourage open conversations about finances, income, assets and who’s earning what when children show up, can be benefited by discussing practical issues rather than spending that time discussing tropical locales for the honeymoon. To many, the thought of a prenup conjures up images of doom and gloom that stem from discussing the end of a relationship before it begins, rather than providing validation the love that is shared. After all, love does not care about one’s financial condition.

However, many conditions exist that can make love interfere with better judgment, considerations such as, is it your second marriage? Does one partner bring more assets to the marriage than the other? Do you own a business? Do you expect an inheritance? One can view marriage as a partnership between husband and wife, and a prenuptial agreement is like a business plan, writing up the framework for the financial component of the relationship while deciding on both obligations and goals. One of the most difficult parts of divorce is often the controversial subject of alimony. A prenup can settle that in advance and help guide the marriage and even prevent divorce if the prospects of financial gain are lessened.

Conversations about finances are not on the minds of many during the courtship stage; however, it would be beneficial if more spouses-to-be discussed many things, which might include religious beliefs or how many children they dream of having--things that tend to surprise even the closest companions when intentions differ.

Our legal system has made it easier than ever to obtain a no-fault divorce in most jurisdictions, yet the promise of a happy, healthy marriage should still have great meaning to those seeking to marry. After all, wedding is not just a scene played out in front of family and friends, it is a contract of obligation between two consenting adults. The simple writing of one’s intentions, commitments and concerns in plain language provided in a well-written prenuptial agreement can establish a strong foundation of trust and openness that any properly committed couple can benefit from.

Contact Bergstrom Attorneys to discuss your questions about a prenuptial agreement, estate planning, and any of other many legal services.  Our firm serves clients in Virginia, Maryland, and the District of Columbia.