By: John Wu, CEO of SharesPost Digital Assets Group
Last month, Jay Clayton, the chairman of the Securities and Exchange Commission, said he is exploring ways to give Main Street investors easier access to the enormous amount of wealth forming in the private markets.
People naturally—and correctly—assumed he was referring to stock in unicorns like Uber and Airbnb, emerging growth firms worth at least $1 billion.
However, though Clayton didn’t specifically reference it, his words would also apply to cryptocurrencies, specifically utility and security tokens. I believe the spirit he was trying to convey is that the SEC needs to provide small investors with better access to all high quality private investments, not just one specific asset.
The SEC’s mission includes three parts: protect investors, maintain fair and orderly markets, and facilitate capital formation. In other words, help businesses raise the money they need to expand and grow.
In 2012, President Obama signed the Jumpstart Our Business Startups Act (JOBS Act) to encourage more companies to pursue initial public offerings. But the law didn’t say companies could only pursue issuing stock. Instead, the JOBS Act created regulatory “channels” that would make it easier for private companies to raise capital in general and investors would ultimately benefit from that.
“It’s clearly good for entrepreneurs and businesses to have the funds needed to hire, grow, and compete,” Troy Paredes, a former SEC commissioner appointed by President George W. Bush, recently told SharesPost.“When the SEC facilitates capital formation – which is central to its mission – it benefits investors too by giving them more companies to invest in to boost their savings.”
What the SEC didn’t anticipate was the rapid emergence of Blockchain technology as a platform for companies to raise capital.
Initially, Blockchain was meant as a means to facilitate the buying and selling of Bitcoin. However, companies have been using Blockchain to raise capital through initial coin offerings (ICOs). Specifically companies are issuing utility tokens, which grants the user access to a service or a product, or security tokens, which can represent units of ownership in a company, just like a stock albeit in digital form.
In 2017, the total value of tokens grew to $37.7 billion, a nearly 19,000 percent increase over the prior year, according to CoinMarketCap and SharesPost research.Companies and investors raised $5.4 billion last year through ICOs.
So far this year, companies have raised more than $14 billion from ICOS, according to Coindesk.com. To appreciate the rapid growth of token sales, consider that U.S. startups (i.e., seed and Series A) last year raised an estimated $8 billion using traditional private placement.
In other words, an increasing number of emerging growth firms are raising capital not by just by issuing traditional equity through IPOs but rather tokens through private ICOs.
Like any new asset, coins and tokens have certainly attracted their fair share of controversy. Bitcoin prices have been extremely volatile. The SEC has cracked down on bogus ICOs and false claims related to Blockchain.
But the agency is doing what it has always been doing: fighting fraud. Though the SEC has not offered broad guidance on whether it will treat tokens as utility or securities, the agency has never said investors should avoid the asset altogether.
In fact, the SEC has done the opposite. The agency is laying the groundwork to provide stability and clarity to the crypto markets. It just won’t happen overnight. The SEC has established working groups to study the issue and appointed a top official to oversee digital assets.
“No conversation about recent efforts at the SEC to foster innovation would be complete” without mentioning Blockchain and cryptocurrencies, Clayton recently told an entrepreneurship conference in Nashville.
“Our efforts in these areas embody two key principles… 1) embrace new technologies that cut costs and provide new investment opportunities while 2) continuing to require that our retail investors have access to material information necessary to make an investment decision,” he said.
It’s worth noting that Clayton made these remarks in a speech that touched upon how the agency can better access the private markets. If Clayton didn’t think digital assets were part of the conversation, he would probably not even bother to mention them.
“We also should consider whether current rules that limit who can invest in certain offerings should expand to focus on the sophistication of the investor, the amount of the investment, or other criteria, rather than just the wealth of the investor,” Clayton said.
Given the amount of wealth already present in the crypto markets, “certain offerings” likely means assets beyond just unicorn stock.