Skadden has submitted a comment letter to the U.S. Securities and Exchange Commission (SEC) on proposed Regulation Crypto Assets (Regulation CA). The letter supports the SEC’s goal of creating a tailored offering regime that promotes capital formation and accommodates innovation while protecting investors. The letter recommends targeted refinements to help ensure that the ultimate framework that the SEC adopts is used as broadly as the SEC intends and gives market participants the certainty it aims to provide.
Financial Statements for Issuers Not Yet Operational
The proposed fundraising exemption in Regulation CA requires issuers to provide two years of U.S. GAAP financial statements, both at the offering and on an ongoing basis. For an early-stage issuer with little or no revenue, an income statement or cash flow statement would mostly report development expenses and the receipt and spending of financing proceeds that could be conveyed more usefully in other formats.
The letter recommends that issuers with no operations and no predecessor business be allowed to omit statements that don’t fit their circumstances, if they:
- certify that they have not yet begun principal operations;
- provide a U.S. GAAP balance sheet (audited for Tier 2 offerings);
- provide a narrative on financial condition, liquidity, planned development costs and how any funding shortfall will be covered; and
- become subject to the full requirements once operations begin.
Reliance on Form TR
Under proposed Rule 400, an issuer could file Form TR to certify that its essential managerial efforts are complete, so the asset is no longer subject to an investment contract. The SEC has said this would not stop other parties from arguing that the asset is still a security, and may also be viewed as requiring issuers to concede that an investment contract existed.
The letter recommends that the SEC:
- confirm that anyone may reasonably rely on a Form TR that has been filed and not withdrawn, with a presumption that the safe harbor’s conditions are met unless the person actually knows the certification is materially inaccurate; and
- confirm that filing a Form TR, or relying on the startup exemption, the fundraising exemption or the safe harbor, is not an admission that a security exists or ever existed.
Tokenized Real-World Assets
Much market interest centers on tokenizing real estate, artwork, loans and other revenue-generating assets, where decentralization is often neither a goal nor feasible. Many of these offerings may fall outside the definition of “covered investment contract.”
The letter asks the SEC to confirm in the adopting release whether and how Regulation CA applies to them. If the regime does not apply, the letter asks the SEC to provide guidance on existing exemptions and, where those exemptions do not fit, to adopt a similarly tailored framework for such assets.
The Skadden team that drafted the letter included Daniel Michael, Alexander Drylewski, Andrew Brady, Joshua Shainess and Peter Varlan of the firm’s Blockchain and Digital Assets Group. The letter reflects the firm’s own views.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.