In English, Section 5 means that you have to have a set of offering documents and those offering documents need to be registered with the U.S.

in r2cornell •  3 months ago 

But BlockFi offers interest accounts just like I have with my bank,” I hear you say, “as do many other DeFi businesses in crypto. It seems these products are offered everywhere in crypto. But I’ve had a bank account for years and my bank isn’t being hauled over the coals by state regulators.”

Preston Byrne, a CoinDesk columnist, is a partner in Anderson Kill's Technology, Media and Distributed Systems Group. He advises software, internet and fintech companies.

So what’s going on? Is this a one-off instance of regulatory overreach or misinterpretation of crypto by legacy regulators, or is it a sign of things to come for all “decentralized” lenders selling investment products across state lines in the United States?

Before we answer that question, it’s important to do a quick review of the rules regarding securities regulation in the U.S. The principal statutes governing securities transactions are the Securities Exchange Act of 1934 and section five of the Securities Act of 1933, which says “unless a registration statement is in effect as to a security it shall be unlawful… to make use of any… communication in interstate commerce… to sell such security” unless an exemption applies.

In English, Section 5 means that you have to have a set of offering documents and those offering documents need to be registered with the U.S. Securities and Exchange Commission (SEC) before you can sell a security to the investing public.

There are a number of exemptions to this requirement. Most frequently encountered in cryptoland are Section 4(a)(2) exemptions for transactions not involving any public offering and Rule 506 exemptions for private placements to accredited investors.

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