Crypto’s Demise Is Overstated

Corporate Law Practice Group

By Corporate Law Practice Group



cryptocurrencyCrypto in St. Louis and the Midwest U.S.

Though not a national leader the St. Louis region has historically shown a comparatively healthy and viable level in crypto activity (currencies, blockchain development, digital strategies, development, and sales of digital products). In 2022, Missouri was the 17th ranking state for most crypto aspects. St. Louis was 31st among US. cities in terms of crypto owners per capita.

Crypto’s Present Damaged State

For the approximately 14 years of the existence of the crypto currencies and digital assets, that industry has globally been particularly mysterious and volatile. And, to summarize that history, suffice it to say that the recent bankruptcies in November 2022 of the FTX cryptocurrency exchange and BlockFi, preceded and followed by such volatility and smaller bankruptcies, have caused many to predict the imminent demise of crypto industries.

However, that volatility existed even before the string of bankruptcies occurring in late 2022. And notwithstanding that volatility, many experts believed that the cryptocurrencies and related industries, all of which are dependent on new technologies (mainly blockchain), were an unadulterated boon to the business world, constituting a particularly efficient system of trade and investment unfettered by regulation.

With crypto being relatively unregulated and using new and not-yet-understood methods of trading and transactions (e.g., blockchain and “smart” contracts), the then existing methods of regulation (e.g., anti-fraud, banking, insurance, commodities and securities law) were (probably mistakenly) not seen as applicable. Continue reading »

Securities Law in Crypto: It’s Everywhere! It’s Everywhere!

Corporate Law Practice Group

By Corporate Law Practice Group



cryptocurrencySuppose you have become a believer in crypto, crypto currencies, blockchain technology and crypto concepts such as non-fungible tokens (“NFTs”). You believe that crypto-based assets (existing now and probably soon to be invented) present opportunities for profitable new businesses. But what do these opportunities look like under the Securities and Exchange Commission (“SEC”) laws?

Opportunity #1: Sell some of your NFTs and manage them for the new owners.

You decide to sell some of your assets to friends and others who are not as knowledgeable in crypto and offer to manage those NFTs for your purchasers.

But your reading of crypto literature has turned up concerning mentions by the SEC that cryptocurrency and crypto-assets are “securities,” like stocks and bonds, and are – or will be – regulated by the securities laws. And some state securities commissions are also making similarly uncertain statements.

Your further research shows that the statutes and the courts define a “security” to be any interest, contract, or transaction involving:

  • An investment of money or valuable property,
  • In a common enterprise,
  • With the expectation that profits will be derived from the efforts of the promoter/seller of the interest or a third party(s).

I.e., the Howey test, named after the Supreme Court case of SEC v. Howey.

The dominant factor in this definition is that of profits expected to be generated by the efforts of persons other than the purchaser/holder of the interest. You realize that your offer to manage the NFTs calls for your efforts to generate profits and may call the Howey definition into play. (We will perhaps discuss the equally uncertain concept of “common enterprise” in a later discussion.)

Opportunity #2: Manage a pool of NFTs. Continue reading »

Recent SEC Rule Amendments Will Make It Easier to Raise Money

Corporate Law Practice Group

By Corporate Law Practice Group



crowdfunding“We’re the SEC, and we’re here to make it easier for small businesses to raise capital. . . . Really, . . . we are . . . really . . . trust us.”

Unbelievable?? Yes, except for the past nine years. But its largesse arrived grudgingly under pressure from Congress in the JOBS Act of 2012, which in turn was due to pressure from the business and entrepreneurial community.

Since the adoption of the Securities Act in 1933, sales of investments by companies and entrepreneurs to investors to raise capital have required either registration with the SEC and states (a long expensive process that is not available to most new and/or small businesses), OR qualification for an “exemption” from the requirement.  The exemptions have historically been difficult and expensive to obtain and are also unavailable to many businesses.

But in the JOBS Act of 2012, Congress adopted 1) two new exemptions: Regulation Crowd Funding and an improved Regulation A (called “Regulation A+”); and, importantly, 2) a requirement for the SEC to modify many of the existing exemptions to significantly improve their availability.  The SEC has since structured the two new exemptions and on November 2, 2020 amended a number of the existing exemptions. The November 2 amendments became effective March 15, 2021. Some of the amendments are as follows: Continue reading »

Investment Crowdfunding Requires an Attorney — with Long Securities Law Experience

Corporate Law Practice Group

By Corporate Law Practice Group



The entrepreneurial press, indeed, even the popular press, is abuzz about regulation crowdfunding (i.e., investment crowdfunding), which became legal on May 16, 2016.  And according to some advertisements (primarily by portals, the businesses which will provide the platforms for such crowdfunding), the fund-raising company does not need an attorney, although it would be “nice.”  Rather, they say, or imply, small and large businesses with their portals can simply get on the internet to quickly fund their ideas and better the economy at the same time!

Do not believe either the buzz or the advertisements.

Regulation CF is Only a Small (Albeit Very Important) Part of the Applicable Law

Regulation crowdfunding (17 CFR Parts 200,  et seq.)(“Reg. CF”) though it is a sea change from (some of) the rules governing entrepreneurial finance, it is not for everyone.  Indeed, for most entrepreneurs it should be considered as a last resort only.  (See, for example, “Regulation Crowdfunding; Is it Right for You?”, St. Louis Small Business Monthly, June 2016, p. 29.)  Secondly, Reg. CF adds to the rules and required steps for legally raising capital , and thus creates even more of a need for the assistance of a lawyer.

That is, the only (albeit very important) change in the law is that now certain “general solicitation” is allowed to promote certain types offerings of securities.  But not all general solicitation is allowed.  (For example, much information which could be promulgated other than on the platform of a portal such as by newspaper or television is still illegal.)

Virtually all other regulations, statutes, laws – and judicial lore – applicable to raising capital prior to Reg. CF remain applicable and will be applied by securities regulators – and by attorneys for investors who lose money in their crowdfunded investments. The securities regulators, which have authority to prosecute suspicious offerings,  have been opposed to and wary of investment crowdfunding since it was required by the JOBS Act in 2012, including Missouri (see, for example, “Kander Issues Investor Alert on Crowdfunding.”)

With the exception of allowing (limited) general solicitation, all the law (and the lore of the regulators and courts which developed since the Securities Act of 1933) still applies to all offerings, including crowdfunded offerings.  So do the complicated rules and methods. For example: Continue reading »

Business Memo: Defending Against Allegations of Unsuitability — Part II: The Period of Limitations

Corporate Law Practice Group

By Corporate Law Practice Group



The most frequent allegation brought against broker-dealers and RRs is that of “unsuitability” of recommendations. We discussed avoiding unsuitable recommendations in our July 2003, February 2004 and September 2004 issues. We discussed in our last issue, July 2007, the defenses of ratification, waiver, estoppel and laches. In this issue we will discuss the statute of limitations, or more precisely, the period of limitations.

As now implemented, the cause of action for “unsuitability” in arbitration has become a sort of “malpractice” action against broker-dealers and registered representatives, similar to negligence and recklessness malpractice actions against lawyers and doctors. That development arose out of the recent movement of disputes out of courts and into arbitration over the past, say, thirty years. The roots of the unsuitability” action, even when resolved in arbitration, are actually in the court action of securities fraud. The action was created in state and federal statutes and rules (e.g., Rule 10b-5) and cases beginning early in the last century. And the roots of its period of limitations, not surprisingly, are in that same action of securities fraud.

Continue reading »

Holy Moses, Batman! They’ve Stolen Our Private Placement Exemptions!

Corporate Law Practice Group

By Corporate Law Practice Group



The Basic Requirements: Early History

Any sale of a security to a Missouri resident must either be registered with the U.S. Securities and Exchange Commission (“SEC”) and the Missouri Securities Commission, or have at least one specific provable exemption from each of those two requirements.

In 1953, the U.S. Supreme Court ruled that the “private offering” exemption of §4(2) of the Securities Act of 1933 (the “1933 Act”) required that the issuer prove that all “offerees” (not only purchasers) had sufficient investment sophistication and financial well-being (hereinafter “investment suitability”) to establish that they did not “need the protection of registration” under the 1933 Act. SEC v. Ralston Purina, 346 U.S. 119 (1953) But because of the illusory definition of “offerees” as including possibly every person who learned of an offering (not just those receiving an “offer” in the contract sense), the availability and thus the usefulness of the private offering exemption of Section 4(2), was thereafter seriously curtailed.

Continue reading »

Business Memo: Defending Against Allegations of Unsuitability – Part I

Corporate Law Practice Group

By Corporate Law Practice Group



As pointed out in our July, 2003 issue, far and away the most frequent allegation brought against broker-dealers and RRs is alleged “unsuitability” of recommendations by RRs. As also pointed out in that issue, a claimant alleging unsuitability must show that the securities or investment program recommended were (1) unsuitable to the investor’s circumstances; and (2) that the broker-dealer and RR held sufficient “control” over the investor.

In that issue, we discussed what aspects of the RR’s recommendations could be unsuitable. In the next two issues, i.e., February, 2004 and September, 2004, we discussed what constituted “control” and what constituted a “recommendation.” In this issue we will discuss briefly the defenses available to a broker-dealer to a claim of unsuitability.

Continue reading »

Business Memo: Are You A Fiduciary? Why Do You Care?

Corporate Law Practice Group

By Corporate Law Practice Group



A lawn care service company sells products and provides services. Registered representatives (“RRs”) and broker-dealers (“B-Ds”) also provide services and sell products (securities, etc.) to their customers. The question here is whether RRs and B-Ds have a significantly higher duty—a fiduciary duty—to their customers.

Most RRs and BDs would automatically react that they provide much more sophisticated services and products than a lawn care service and therefore treat their customers with a higher level of care. However, when that customer complains about their service, and perhaps brings a claim in arbitration or litigation, well-advised B-Ds and RRs argue that their duty was not that of a fiduciary.  Liability on such a claim frequently turns on whether, and is much more likely if, the arbitrators or court believes that the B-D and RR had a fiduciary duty to the customer.

Continue reading »

Selling Away: You and Your RR Can Both Be Honest and Still Be Liable to Someone Who is Not

Corporate Law Practice Group

By Corporate Law Practice Group



“Selling away”, as you know, occurs when an RR invests his client’s money without doing so at or through the brokerage firm at which he is employed. Although it occurs in all types of brokerage situations, it occurs most frequently in non-traditional, generally off-site situations. According to the NASD, selling away is the most frequently committed violation by off-site RRs. For example, RRs who also sell insurance products frequently operate in off-site locations, and selling away frequently occurs on the part of independent insurance agents registered only as Series 6 investment company and variable contract products representatives. These RRs are frequently targeted by issuers, promoters and marketing agents to sell variable contracts and promissory notes to their customers. In many instances these products constitute securities, but their promoters market them to RRs as non-securities products that do not have to be sold through the RR’s broker-dealer.

“Selling away”, also known as “private securities transactions”, is a violation by the RR of his obligation to submit to the supervision of his BD, and to allow it is a violation by the BD of its duty to supervise all securities transactions by the RR. “Selling away” is easy to do even without knowing it.

Continue reading »

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