Deconstructing The SEC’S Cryptocurrency Suppression Program – Part 6: Why

INTRODUCTION

This article is the sixth in a series that explains how the SEC has structured a campaign to suppress and eradicate cryptocurrency and digital tokens, why the SEC lacks jurisdiction over creators of cryptocurrencies and digital tokens, and how best to challenge these actions.

In the almost-five years since its 2018 pronouncement, the SEC has neither disclosed the number of cryptocurrency producers that have attempted but failed to have their cryptocurrency coins registered, nor has it discussed why these efforts failed. Relatedly, the Commission has not offered any public guidance about how cryptocurrency producers can register their coins or tokens as securities under the Securities Act.

The problem is obvious: cryptocurrency producers cannot register their tokens because they are not securities and cannot be accounted for as such. While the characterization of digital tokens as investment contracts enables the SEC’s Division of Enforcement to bring shut-down lawsuits, the correct financial accounting for these items makes registration with its Division of Corporation Finance impossible. In other words, the SEC’s enforcement program is predicated on impossible compliance with the statute it claims to be enforcing.

SECURITIES ACT REGISTRATION REQUIRES A BALANCE SHEET

Registration of securities is not a unilateral or one-way process. A company that seeks to register a given number or currency amount of securities prepares and files a proposed registration statement, which includes the prospectus, and the SEC’s Division of Corporation Finance makes comments on that statement. If and only if the company complies with those comments will the Division of Corporation Finance allow the offering to become “effective,” which is the only basis on which the company does not risk having the Division of Enforcement bring a legal action for violating the registration provisions.

A BALANCE SHEET INCLUDES ASSETS AND CLAIMS AGAINST ASSETS

Among the items required in the prospectus are the company’s financial statements, one of the most important being the balance sheet. A balance sheet shows the financial “position” of the company at a given point in time, and it has two key parts: the assets, which appear on the left of the balance sheet, and what can be characterized as the claims against those assets, which appear on the right side of the balance sheet. If the balance sheet is laid out horizontally, the assets are on the left side and claims against assets are on the right side.

The assets include a list of classes of assets with their fair values and include product inventory, cash and receivables (mostly, contract-based rights) obtained from operations (sales), investment disposals, and financing transactions. The claims against those assets lists the company’s classes or specific instances of liabilities (or debt) and equity (or ownership)[iii] and arise from different sources: debt claims arise from contracts between the company and lenders and creditors, while equity or ownership claims arise from state law (typically, the state’s business corporation law).

The total value of the listed assets must equal (or balance) the total value of the listed claims against them, as reflected in the classic accounting equation: assets equal liabilities and equity. In effect, all of a company’s assets (as a pool of assets) must be ultimately owned by and allocable to the claimants of those assets. The “securities” must be among the claims against assets because the assets, which are on the other side of the balance sheet, “secure” the claims against those assets, that is, giving them an accounting-based value. While all ownership (equity) claims are securities, not all liabilities (such as credit obligations to suppliers) are debt securities.

CLAIMS AGAINST ASSETS ARISE FROM SALES…