Startup founders should “avoid the US market at all costs” when conducting token sales. This advice comes from Miles Jennings, the chief legal counsel of the digital assets division at Andreessen Horowitz (a16z).
“The SEC claims that almost every token must be registered under US securities laws,” he commented.
According to Jennings, public and private sales of crypto assets outside the US can be structured to avoid falling under the jurisdiction of the American agency.
Jennings highlighted the discrepancy between blockchain developers’ vision of decentralization and the regulatory framework applied by the SEC. In his view, ICOs often meet all the criteria of the Howey Test.
If an asset is deemed a security, issuers face lengthy procedures, disclosure requirements, and financial obligations for registration. Failure to comply often results in severe penalties, the expert noted.
Tensions between crypto startups and the Commission arise from a fundamental clash of perspectives.
On one hand, the agency seeks to protect investors by ensuring transparency and preventing information asymmetry.
On the other hand, blockchain advocates promote a decentralized model that distributes power among all participants, relying on the transparency of the distributed ledger.
The absence of centralized control and the challenges in measuring the degree of true decentralization create problems for regulators.
In addition to avoiding the US for token sales, a16z offered four more recommendations to startup founders:
- Maximize decentralization. Achieving a sufficient degree of decentralization can mitigate many of the risks identified by the SEC and render their application essentially unnecessary.
- Careful communication is crucial. a16z advises adhering to a strict communication policy that minimizes the perception of tokens as an investment opportunity according to the Howey Test.
- Manage secondary market risks. The SEC has penalized projects for premature listing and efforts to create conditions implying an official offering of crypto assets.
- Ensure vesting. At least a one-year lock-up on tokens issued to insiders and affiliates is critical. This helps prevent legal issues and supports the project’s long-term stability by reducing market pressure and demonstrating commitment to the project’s future.
To further safeguard against regulatory risks, Jennings suggests employing strategies like “Protocol-Owned Liquidity” and “Liquidity Pools,” which involve indirect token sales through decentralized mechanisms such as DAOs and liquidity pools.
Earlier, CTO of a16z Crypto, Eddie Lazarin, stated that meme coins are “not very interesting from a technical perspective.”
Previously, company partner Brian Quintenz noted that the SEC has “explicitly recognized” Ethereum’s status as not being a security. This occurred in October 2023, when the agency approved an ETF based on futures of the second-largest cryptocurrency by market capitalization.