Feeling increased legal scrutiny from U.S. regulators, many token issuers have looked to sell tokens outside the U.S. in markets with less stringent regulation. Often, these issuers block U.S. investors from purchasing the token, but they still advertise the token sales in U.S. publications. These token issuers may be unaware that U.S. securities regulations impose certain advertising restrictions on foreign issuers on the theory that U.S. advertising might “condition” the U.S. market for eventual sale. There are, however, certain exceptions to the advertising restrictions that might allow a foreign cryptocurrency issuer to engage in limited advertising in the U.S.
U.S. law on securities registration is generally concerned with protecting U.S. investors by requiring disclosure of information about securities offered in U.S. markets. To this end, the Securities Act generally prohibits persons from offering to sell securities in interstate commerce without registration with the SEC. Violation of §5(c) can subject an issuer to a range of SEC sanctions, including injunction, civil penalties, and even criminal fines and imprisonment.
As can be seen from the language, the Act §5(c) itself does not limit the U.S. Securities and Exchange Commission (SEC) jurisdiction by geography. The statute facially appears to include offers to persons outside the U.S., even by foreign issuers. Given this broad language, courts have interpreted this statute to give the SEC expansive authority to regulate the offering and sales of securities that might make their way into the U.S. market. To clarify the SEC’s jurisdiction and intention with respect to offers and sales of securities outside the U.S., in 1998 the SEC adopted Regulation S. In an opening “general statement”, Regulation S states that Securities Act Section 5’s prohibition on offers to sell securities without a registration statement does not apply to offers and sales “that occur outside the United States.”
Recognizing that it might be unclear when offers or sales of securities “occur outside the United States”, the SEC added further guidance to Regulation S, specifying several Requirements and conditions. For example, to quality, the offer of a sale must be made in an “offshore transaction”.
Of relevance here, Regulation S states that an offer or sale can be considered to occur outside the U.S. only if no “directed selling efforts” are made in the U.S. by the issuer. The term “directed selling efforts” is defined earlier in Regulation S and refers to “any activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market in the U.S. for any of the securities being offered in reliance on this Regulation S.” Providing further guidance, Regulation S more specifically states that “directed selling efforts” include (though are not limited to), advertisement in a publication with general circulation in the U.S., defined as any publication that is printed primarily for distribution in the U.S. or that has had, during the preceding twelve months, an average circulation in the U.S. of 15,000 or more copies per issue.
The upshot of the prohibition on “directed selling efforts” is that issuers who sell tokens outside of the U.S. and restrict purchases by U.S. citizens but who advertise in large U.S. publications may – simply by virtue of the advertisement –be “offering” unregistered securities in the U.S., in violation of Securities Act §5(c). Interpreted aggressively, this could subject a foreign issuer selling tokens outside of the U.S. to the full panoply of civil and criminal remedies available for violation of the Securities Act’s prohibition on offering unregistered securities.
Regulation S does contain several exceptions to this general prohibition though. For example, Regulation S states that the term “directed selling efforts does not include placing an advertisement required by U.S. for foreign law, certain distribution in the U.S. of a foreign broker-dealer’s quotations, and publication or distribution of certain research reports.”
An issuer selling tokens abroad but seeking to advertise the sale in the U.S. does have at least one potential option without risking violation of Regulation S and the Securities Act. Regulation S allows “tombstone advertisements” in publications with a general circulation in the U.S. Regulation S does not define “tombstone advertisement”, but in the securities industry a tombstone advertisement generally refers to a written advertisement without graphics, in simple, centered text style with large amounts of whitespace (thus resembling a tombstone).
Regulation S permits issuers of unregistered securities abroad to place a tombstone advertisement in a publication with a general circulation with several restrictions:
1) the publication must have less than 20% of its circulation in the U.S.;
2) the advertisement must state that the securities offered are unregistered and may not be offered or sold in the U.S. absent registration or an exemption; and
3) the advertisement contains only basic information, including the issuer’s name, the amount and title of securities sold, the price of securities, and other basic information listed in the regulation.
In sum, issuers selling tokens abroad do have legally permitted options for advertising the issue in the U.S. These issuers should keep in mind the requirements of Regulation S, including the prohibition on directed selling efforts so as to avoid potential subjection to U.S. regulatory scrutiny.
– Michael Fluhr is a partner at law firm Squire Patton Boggs in San Francisco with significant experience in the cryptocurrency sector.
