Securities and Exchange Commission (SEC) commissioner Hester Peirce has proposed a three-year safe harbor period for cryptocurrency startups looking to issue tokens.
During her speech at the International Blockchain Congress in Chicago, Peirce said that crypto businesses should have a three-year harbor period from their initial token sales before the SEC determine whether they need to comply with the agency’s securities laws, Coindesk reported.
Recently, the SEC has taken action against a number of crypto businesses that have raised funds through token sales. Telegram, for example, was accused of conducting an “illegal” sale of “digital-asset securities called Grams” by the SEC in Oct. 2019. While Telegram contended that Grams are not securities, the SEC believes otherwise and claimed that the token sale should have complied with the agency’s securities regulations.
Peirce argued in her Thursday speech that “the analysis of whether a token is offered or sold as a security is not static and does not strictly inhere to the digital asset.”
In other words, while a digital asset may look like a security at first, it could potentially become decentralized enough in the following years to no longer resemble a security.
If adopted, Peirce’s proposal would set up clear parameters for crypto startups to conduct token sales. Issuers, for example, would have to provide personal disclosures, code disclosures, public notices, among other documents.
The proposal would also set up an “initial development team” to monitor the business’ growth in the following three years and decide whether the network has reached “network maturity” – meaning that the network is operational but is “not controlled and is not reasonably likely to be controlled” by a single entity.
“The definition of Network Maturity is intended to provide clarity as to when a token transaction should no longer be considered a security transaction but, as always, the analysis will require an evaluation of the particular facts and circumstances,” said the proposal.
Liquidity is also a consideration for the SEC’s assessment and the business would have to secure secondary trading markets to create liquidity for its token.
"Admittedly, the liquidity condition may surprise observers of SEC staff positions in which attempts to facilitate secondary trading have been viewed as indicia of a securities offering," Peirce said. "In the context of the safe harbor, by contrast, secondary trading is recognized as necessary both to get tokens into the hands of people that will use them and offer developers and people who provide services on the network a way to exchange their tokens for fiat or cryptocurrency."
Notably, the safe harbor period should only be granted on a good faith basis, Peirce said, which means that a business or individual who is already considered “a bad actor under the securities laws” would not be eligible for the grace period.