Securities Registration Requirements Holding Bitcoin Back
The commissioner of the Texas State Securities Board issued anemergency order last week barring a private energy exploration company from accepting investments in bitcoin from non-accredited investors. The company, Balanced Energy LLC, allegedly solicited investors at the Texas Bitcoin Conference on March 6th with the statements “we don’t do any verification” and “we’re not the paperwork police,” and informed interested parties that capital contributions in bitcoin would be accepted. No fraudulent behavior was alleged by the Texas State Securities Board in its order, but the company was ordered to furnish potential investors with a disclosure informing them that Bitcoin is volatile and that their investment may be subject to extraordinary risk as a result.
The issue of Bitcoin securities registration has become a major hindrance to Bitcoin startups operating in the United States. The JOBS Act of 2012 would have removed restrictions on unregistered securities offerings over the internet, but has been bogged down by SEC deliberations and is now more than a year late. Though failure to register is not generally a criminal matter, firms that violate the rules can face substantial civil penalties. Combined with tight lending standards and general skepticism about Bitcoin, securities registration has limited fundraising sources for Bitcoin startups almost exclusively to a select few intrepid venture capitalists.
Companies looking to raise capital by selling shares to the public are required to meet certain requirements outlined by the Securities and Exchange Commission and the various state securities regulators, including registration, restrictions on timing, solicitation methods and target investors. For small issues, exceptions to the registration requirements exist to help companies that might otherwise be overly burdened by the registration and solicitation process. However, these companies are still required to meet strict rules on the amount of capital that can be raised and how often, who can invest and how potential investors may be solicited. For the most part, only accredited investors can participate.
Accredited investors must have an income of at least $200,000 per year for an individual or a net worth of at least $1,000,000, exclusive of the investor’s primary residence. This income floor is meant to ensure that high risk investments are available only to investors who are sophisticated enough to understand them and financially stable enough to afford a total loss. General solicitation to non-accredited investors, such as advertising over the internet, is not permitted under any circumstances under current law. Crowdfunding websites, such as Kickstarter, get around the restriction by offering what usually amounts to pre-purchase of a company’s product or some other token payment that is unrelated to actual profitability. However, anecdotal accounts have suggested that many participants in successful Kickstarter campaigns ultimately receive nothing at all from the companies to which they contribute.
Bitcoin provides a convenient and efficient means of crowdfunding mining pools, exchanges, and various other startups in the Bitcoin community, providing companies with the ability to avoid costs associated with underwriting, which can be substantial. At least one website, BitFunder.com, provided a centralized place to both solicit and offer shares in Bitcoin related startups before shutting down last fall. Many of the innovations suggested by the blockchain, such as Colored Coins, hold promise as ways that securities can be automatically sold, transferred, recorded and voted without need of an intermediary. Further, the concept of self-executing contracts, powered by Ethereum, could take much of the risk of non-performance by managers of startups off the table. Given the technological sophistication of most Bitcoiners, equity crowdfunding with payment in bitcoins is undoubtedly a solid match.