Securities and Exchange Commission member Mark Uyeda suggested in a July statement that his agency had missed the mark with its approach to cryptocurrency, and proposed a shift in how the SEC handles S-1 requirements for crypto — the process by which companies publicly offer and distribute digital assets.
“Many of these issuers and crypto digital assets have characteristics for which Form S-1 may technically require information that is not relevant or applicable,” Uyeda noted in his statement. “This approach … is problematic because it neither facilitates capital formation nor protects investors. Consideration should be given to allowing variances from Form S-1 for crypto digital assets, similar to that given for fund and insurance products and other securities products.”
Such a shift would move the agency away from pure enforcement and toward constructive regulation, and offer a more viable path for digital-asset issuers seeking to comply with securities laws.
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Disclosure is the backbone of investor protection. It enables informed investor decision-making, ensuring that market participants have the information necessary to weigh risks and rewards. For issuers, disclosure falls into two broad categories: initial and ongoing. Initial disclosure, covered by an S-1, outlines key information — such as risks, financial information, and operational details — that a company must present before it can publicly trade its securities in U.S. markets. Ongoing disclosure, by contrast, refers to the continuous reporting requirements (e.g. 10-Ks, 10-Qs, 8-Ks) that keep investors up to date on a public company’s status.
Uyeda’s comments are a crucial step toward progress for crypto firms seeking to issue tokens as publicly traded securities. Equally important is the need to provide for ongoing disclosures for new and existing securities.
SEC Commissioner Mark Uyed called for an update to the S-1 form to better handle crypto. Source: X
Regardless of regulatory mandates, crypto communities are increasingly demanding timely and ongoing financial disclosures from blockchain foundations. Cosmos’ foundation leadership at non-profit ICF took recent criticism from its community for failing to publish financial reports, while the Ethereum Foundation is also feeling pressure to provide more timely financial reporting.
Concerns surrounding foundations’ inability to report show investor and community demand for ongoing financial information. Current methods for reporting — annual, quarterly, and current reports — feel outdated and insufficient, particularly viewed through the lens of the crypto industry. These static, periodic reports may be ill-suited to the dynamic, real-time nature of blockchain technology.
Blockchain technology offers an elegant solution to updating ongoing disclosures. Blockchain data is inherently real-time, and its open-source feeds can be plugged into a variety of applications. Blockchain explorers, for example, offer continuously updated, transparent data on the underlying blockchain activity such as transaction data, active users, hash rate, net assets flows, and so on. Instead of requiring crypto companies to file traditional reports, regulators should consider leveraging the transparency and immediacy of blockchain data itself as providing current information regarding the issuer.
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Imagine a system where key blockchain metrics are automatically reported through an API into a digital asset-specific version of EDGAR — the SEC’s existing reporting platform for traditional securities. A live data feed would ensure that investors have ongoing access to material information, enabling better and more informed investor decision-making.
The crypto industry has consistently argued that it cannot operate under current securities law. However, a pathway is emerging that involves tailoring S-1s for new issuances of digital asset securities and utilizing blockchain data for ongoing disclosure. Existing crypto companies could be grandfathered for public trading under the federal securities laws by complying with ongoing disclosure requirements through continuously updated blockchain data feeds. New digital asset issuers can have a path to registration and public trading through an S-1 tailored for crypto’s unique characteristics as suggested by Uyeda.
By adopting this approach, crypto companies would have a direct path to regulatory clarity and compliance. This would also reduce enormous legal costs and distractions. This solution offers the best of both worlds — enabling innovation while upholding the principles of investor protection.
Aaron Kaplan is the co-CEO of Prometheum Inc. Its affiliate, Prometheum ATS, offers a blockchain-enabled ecosystem for trading digital assets. Another affiliate, Prometheum Capital, engages in clearance, settlement and custody for digital assets. Kaplan previously served as Of Counsel at Gusrae Kaplan Nusbaum, a law firm in New York City, and founded companies that include EquityArcade and Coincross. He holds an undergraduate degree from the University of Wisconsin-Madison and a law degree from Thomas Jefferson School of Law.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.