Should you be an ICO advisor, p2p platform, or in the of business connecting “investors” or customers interested in cryptocurrencies and their targets, otherways trading in cryptocurrency, you must have got the feeling of half-legality and lack of secureness at least once. Well, as it is expressly disclaimed everywhere, the risks and merits are always involved, there are no warranties and you are solely responsible for your actions. The gradual attempts of the regulators have so far created the general “over-paranoia” about activity in cryptocurrencies in the U.S. One of the ghosts wandering around is the need of the broker-dealer license for the persons somehow engaged in facilitating transactions with cryptocurrencies.
Starting from the very beginning, it is worth getting into who broker-dealers are. As regulated by the Exchange Act, brokers and dealers, unless exempted, have to register with еру SEC. You foreseeably won’t get exempted but don’t lose hope. Brokers and dealers are actually people engaged in buying and selling or otherwise effecting transactions with securities. The main difference between brokers and dealers is that the latter do it at their own expense. If you look through the SEC’s guide on the “broker-dealer” issue, you will certainly find out that “finders,” “business brokers” and others who are, for instance, involved in finding investors, customers for investment companies, hedge funds, entities issuing securities, “angel” financings, including private placements; investment advisers and financial consultants; persons that operate or control electronic or other platforms to trade securities, they all are included in the list of persons to be called brokers and therefore registered with the SEC.
Before losing consciousness, one should figure out the main features of “broker-dealers” activity, they may make things clear. If you are a broker or dealer:
- You “play” with securities. And this is the key point. All the regulations connected to brokers and dealers may affect exclusively those who are somehow engaged in transactions with securities (security tokens). Both in the Exchange Act, and in the latest FINRA letter the attention of the authorities in focused on the monitoring of such transactions. Utility token worshippers may now sigh with relief and continue reading just for fun or for gloating.
- You receive a compensation and it is your business. A common misconception is that the absence of the compensation directly from the transaction excludes the requirement of registration as a broker-dealer. It is not completely unjustified but a bit taken out of context. For instance, the guys from an investment entity with an online-platform AngelList LLC have successfully filed the No-Action letter with the SEC, where they have explicitly mentioned the fact of receiving no transaction-based compensation, no “salesman’s stake”, benefiting exclusively from the general profitability of the investment. However, they have also made a dozen of other representations, including, most importantly, the registration as an investment adviser with the SEC. Therefore, facilitating transactions with securities and receiving no direct compensation is yet not enough to be registration-exempt.
- You give your two cents. Namely, you are actively participating in securities transaction, including solicitation, negotiation, or execution of the transaction. So, if you do care who wins from the transaction, and you are not completely neutral, or provide advice to any party, you are reportedly falling into the scope of this criteria.
- You make it public. Advertising, sharing and in any way marketing the fact that your business is buying and selling security tokens or facilitating the transactions with them will purportedly mean you should register.
Still, prior to jumping to conclusions, we shall take into account that one may simply be a “finder”. Those are unregulated and not defined in the federal laws. Basically, they are the persons who may be exempt from the broker-dealer registration, so to be a finder you merely need to be the antipode of the person described above. Being a finder gives you an opportunity to get involved in the security token transactions and still not fall under the Exchange Act regulations.
You can ask yourself a few questions to make sure you are one, but be sincere, trust me, it is for your own sake:
- Are you engaged in transactions with security tokens? Is there a risk that the SEC may consider the tokens subject to the transaction a security?
If no, you are free as a bird: advice, solicit, connect, make money, spread peace. Further questions do not apply to you. If yes, you better check the others.
- Is it your business?
If no, you may be considered a trader. The aforementioned SEC guide sets forth that those who trade securities (security tokens) at their own expense, not as part of their regular business, are traders and are subject to completely different regulations.
- Do you receive a direct compensation from the transactions, so called “transaction-based” commission?
There isn’t a safe answer to this question. “No” does not help you if security tokens are involved. And “yes” at this stage probably means that you are not a finder but a broker or a dealer.
- Do you solicit, negotiate for either party of the deal?
“Yes” brings you straight to broker-dealer, or investment advisor, under the Investment Advisers Act, except if it was accidental, not direct, not regular and you did not receive any additional profit or fee for the advice.
- Well, as to the advertising, your public statement of trading securities apparently excludes the need to look for any exemptions or loopholes.
Disclaiming any doubts, to be deemed a “finder” you should have answered “no” to all the 5 questions without hesitation. Also worth mentioning is the SEC’s explicit statement suggesting the persons simply maintaining a platform or mechanism that permits any of the activities which are to be performed by the brokers or dealers do not fall under the regulation unless they somehow get involved in such activities.
Generally speaking, if at least one of those points applies to you, it automatically puts you at risk, despite other factors being negative. To be completely safe, one should not mess with security tokens at all. In that case, the ghost of registering won’t mess with the utility tokens, but no guts, no glory, right?