SEC Cracks Kraken In Yet Another Mammoth SEC Crypto-Victory
This case is a significant development in the ongoing regulatory battle between the SEC and cryptocurrency platforms. The ruling against Kraken underscores the importance of compliance with U.S. securities laws, even for transactions conducted on secondary markets. The judge's decision to deny Kraken's motion to dismiss highlights that digital assets traded on platforms like Kraken may indeed constitute investment contracts, subject to SEC oversight.
The ruling reaffirms that the Howey Test applies to both primary and secondary market transactions, and that investor expectations and the economic realities of transactions are crucial in determining whether an asset qualifies as a security. This decision aligns with the SEC's broader strategy of holding crypto platforms accountable for failing to register as brokers, dealers, alternative trading system (ATS) or exchanges, ensuring that investors receive the protections they are entitled to under U.S. law.
Judge Orrick's thorough analysis and rejection of Kraken's arguments, including those referencing the Ripple decision and the major questions doctrine, illustrate the judiciary's growing consensus on the application of securities laws to digital assets. This ruling adds to the body of case law that could serve as a reference for future enforcement actions and regulatory clarity in the crypto space.
For crypto companies, this case is a stark reminder of the legal risks associated with operating in the U.S. without proper registration and compliance measures. The SEC's victory here is another step in its ongoing efforts to regulate the crypto industry and protect investors.
Read an objective analysis by John Reed Stark, key excerpts and more at: https://lnkd.in/eZ2dDAZf
The SEC uses the Howey Test to determine whether a crypto asset qualifies as a security. The key points the SEC examines include:
Investment of Money: Whether the asset was purchased with money or another form of value.
Common Enterprise: Whether the investors' fortunes are tied to the success of the project or the efforts of the issuer or promoter.
Expectation of Profits: Whether purchasers expect to earn a return on their investment.
Efforts of Others: Whether the expected profits rely primarily on the efforts of the project's developers, promoters, or a third party.
If a crypto asset meets all the criteria of the Howey Test, it is likely considered a security by the SEC. This classification means the asset and its issuers must comply with U.S. securities laws, including registration and disclosure requirements.
The Shift Toward Digital Asset Securities
As Web3 technology continues to disrupt traditional finance, digital asset securities—commonly referred to as equity tokens—are emerging as a powerful tool for companies to raise capital. These digital securities represent ownership in an underlying asset, such as unrestricted shares in a company, but with the added advantages of blockchain’s transparency, efficiency, and security. For companies, particularly in the crypto space, exploring compliant methods to issue these tokens is critical.
The combination of the Regulation A+ (Reg A+) exemption and the Ohanae OTC Market Platform (Ohanae Platform) offers an ideal solution for companies looking to tap into the benefits of digital asset securities. Reg A+ provides a regulatory framework that allows companies to raise up to $75 million annually from both accredited and non-accredited investors. When coupled with the innovative Ohanae Platform, companies can efficiently list, trade, and manage equity tokens, paving the way for a new era in capital formation.
Understanding Reg A+: A Brief Overview
Reg A+, a provision of the Jumpstart Our Business Startups (JOBS) Act, was designed to make it easier for smaller companies to access capital through public offerings. The exemption is divided into two tiers:
Tier 1: Allows companies to raise up to $20 million in a 12-month period, subject to both state and SEC review.
Tier 2: Allows companies to raise up to $75 million within a 12-month period. Tier 2 offerings are subject only to SEC oversight, which preempts state securities regulations, making it more attractive for issuers.
One of the key benefits of Reg A+ is that it permits companies to raise capital from a broad range of investors, not just accredited investors. This democratizes investment opportunities and opens the door to a larger pool of potential capital.
The Ohanae Platform: A Web3 Approach
The Ohanae Platform is a next-generation alternative trading system (ATS) that specializes in the listing and trading of digital asset securities. Built on Web3 technology, Ohanae offers a transparent, efficient, and secure environment for the issuance, trading, and management of equity tokens.
Key features of the Ohanae Platform include:
Web3-Powered Transparency: Every transaction is recorded on the Ohanae Blockchain, ensuring a transparent and immutable record of ownership.
Automated Market Maker (AMM): The platform incorporates an AMM based on the Constant Product Formula, ensuring liquidity and fair pricing for equity tokens.
KYC/AML Compliance: Ohanae's integrated compliance tools ensure that all participants meet Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements before trading.
Single Source of Truth: The Ohanae Blockchain serves as the central ledger, eliminating the need for off-chain records and ensuring consistency across all transactions.
By utilizing the Ohanae Platform, companies can efficiently manage the lifecycle of their digital asset securities, from issuance to secondary trading.
The Strategic Advantage: Combining Reg A+ with Ohanae
Access to a Broader Investor Base: Reg A+ allows companies to reach both accredited and non-accredited investors, significantly expanding the potential investor pool. This is particularly beneficial for companies in the crypto space, where there is often strong retail investor interest.
Streamlined Compliance: One of the main challenges for companies issuing digital asset securities is navigating the complex regulatory landscape. The Ohanae Platform simplifies this process by embedding compliance into its core infrastructure. This includes automated KYC/AML checks, and market conduct rules, all of which are essential for maintaining regulatory compliance.
Efficient Capital Raising: By combining the capital-raising capabilities of Reg A+ with the trading infrastructure of the Ohanae Platform, companies can streamline the entire process of issuing and managing equity tokens. This efficiency translates into cost savings and quicker access to capital, both of which are critical for companies in fast-moving industries like Web3 and fintech.
Enhanced Liquidity: The AMM feature on the Ohanae Platform ensures liquidity for equity tokens, which is a key concern for both issuers and investors. With built-in liquidity management, companies can be confident that there will be a market for their tokens, even in volatile conditions.
Transparency and Trust: Web3 technology, as implemented on the Ohanae Platform, provides a transparent and immutable record of all transactions. Equity token builds trust with investors, who can independently verify ownership and transaction history. For companies, this transparency reduces the risk of disputes and enhances the overall credibility of the offering.
The Benefits of a Non-Regulation National Market System (non-Reg NMS) ATS
The Ohanae Platform operates as a non-Reg NMS ATS, which provides several unique advantages for issuers and investors:
Regulatory Flexibility: Unlike Reg NMS exchanges such as NYSE and Nasdaq, non-Reg NMS ATS like Ohanae is not subject to the same stringent regulations. This allows for greater flexibility in listing and trading digital asset securities, making the platform more adaptable to the needs of innovative companies in the crypto space.
Tailored Trading Environment: As a non-Reg NMS ATS, the Ohanae Platform can offer a more specialized and focused environment for trading equity tokens. This is particularly beneficial for companies and investors who are specifically interested in digital asset securities, as the platform is designed to cater to their unique needs.
Cost Efficiency: The regulatory requirements for non-Reg NMS ATSs are generally less burdensome than those for Reg NMS exchanges, which can result in lower operational costs. These savings can be passed on to issuers and investors, making capital raising and trading more cost-effective.
By choosing a non-Reg NMS ATS like Ohanae, companies can take advantage of a regulatory environment that is more conducive to innovation, while still ensuring compliance and security for their offerings.
Why Use Reg A+ and Ohanae for Equity Tokens?
Regulatory Clarity and Compliance: One of the biggest challenges in the digital asset space is regulatory uncertainty. Reg A+ offers a clear, well-defined regulatory framework that is recognized by the SEC. By issuing equity tokens under Reg A+, companies can ensure that they are operating within a compliant and legally sound structure.
The Ohanae Platform further reinforces this compliance by embedding regulatory requirements into its operations. This dual-layered approach—Reg A+ for the offering and Ohanae for the trading—provides a comprehensive solution that addresses the regulatory needs of issuers and investors alike.
Cost-Effectiveness: Traditional IPOs can be prohibitively expensive, particularly for smaller companies. Reg A+ provides a more cost-effective alternative, with lower regulatory hurdles and fees. When combined with the Ohanae Platform, which automates many aspects of compliance and trading, the overall cost of capital formation is significantly reduced.
Broader Market Access: The ability to raise capital from non-accredited investors is a game-changer, especially for companies with strong brand loyalty or a large retail following. Reg A+ democratizes investment opportunities, allowing everyday investors to participate in offerings that were previously reserved for institutional players. The Ohanae Platform’s digital-first approach aligns perfectly with this democratization, providing easy access to the market for all participants.
Future-Proofing: As the market for digital asset securities continues to evolve, companies that leverage both Reg A+ and the Ohanae Platform are positioning themselves at the forefront of this transformation. By embracing compliant and innovative methods of capital raising, these companies are not only meeting today’s demands but also future-proofing their operations for the next wave of financial innovation.
Case Study: A Hypothetical Example
Imagine a mid-sized crypto company, CryptoInnovate Inc., that has developed a cutting-edge blockchain solution. CryptoInnovate wants to raise $50 million to expand its operations and accelerate product development. Given its strong retail following and the innovative nature of its business, the company decides to issue equity tokens representing ownership in the company.
Step 1: Leveraging Reg A+: CryptoInnovate files a Reg A+ offering with the SEC, targeting both accredited and non-accredited investors. The offering is well-received, attracting interest from a diverse range of investors who are excited about the company’s potential.
Step 2: Issuing Equity Tokens on Ohanae: The company uses the Ohanae Platform to tokenize its equity, converting shares into digital asset securities. These tokens are listed on the Ohanae Platform, where they can be traded in a transparent and compliant manner.
Step 3: Trading and Liquidity: Thanks to the AMM feature on Ohanae, there is a healthy market for CryptoInnovate’s equity tokens, with continuous price discovery and liquidity even during market fluctuations. Investors can easily buy, sell, or hold their tokens, all while having confidence in the platform’s compliance and security measures.
Step 4: Post-Issuance Management: With the Ohanae Platform’s blockchain-based ledger, CryptoInnovate efficiently manages its cap table and complies with ongoing disclosure requirements. This reduces administrative overhead and allows the company to focus on its core business objectives.
This hypothetical example illustrates how combining Reg A+ and the Ohanae Platform can offer a seamless and efficient pathway to capital formation through digital asset securities.
Summary: A Strategic Path Forward
The combination of the Reg A+ exemption and the Ohanae Platform offers a powerful and innovative solution for companies looking to raise capital through digital asset securities. By leveraging the regulatory clarity of Reg A+ and the technological advantages of the Ohanae Platform, companies can efficiently issue, manage, and trade equity tokens in a compliant and secure manner.
For companies, particularly in the crypto space, this approach represents a strategic path forward—one that balances innovation with compliance, cost-efficiency with broad market access, and transparency with security. As the market for digital asset securities continues to grow, those who embrace this model will be well-positioned to capitalize on the opportunities of tomorrow.
Disclaimer
Ohanae Securities LLC is a subsidiary of Ohanae, Inc. and member of FINRA/SIPC. Additional information about Ohanae Securities LLC can be found on BrokerCheck. Ohanae Securities LLC is in discussions with FINRA about exploring the expansion of business lines for the broker/dealer. Any statements regarding abilities of Ohanae Securities LLC are subject to FINRA approval and there are no guarantees FINRA will approve the broker/dealer’s expansion.
Ohanae Securities is seeking approval to be a special purpose broker-dealer that is performing the full set of broker-dealer functions with respect to digital asset securities – including maintaining custody of these assets – in a manner that addresses the unique attributes of digital asset securities and minimizes risk to investors and other market participants. If approved, Ohanae Securities will limit its business to digital asset securities to isolate risk and having policies and procedures to, among other things, assess a given digital asset security’s distributed ledger technology and protect the private keys necessary to transfer the digital asset security.