a16z Crypto advises startup founders to ‘never publicly sell tokens’ in the US

The crypto arm of venture capital firm Andreessen Horowitz, a16z Crypto, warns startup founders against exiting the United States market when conducting token sales.

“Public sales of equity and tokens and private sales of equity and tokens outside the US can all be conducted in compliance without being subject to the registration requirements of securities laws,” wrote Miles Jennings, general counsel and head of decentralization at 16z Crypto. “Public sale in America is its own goal, avoid at all costs.”

Jennings explained that Initial Coin Offerings (ICOs) usually meet all the criteria of the US Securities and Exchange Commission's Hawaii test to determine whether a financial asset should be classified as a security. A security is “a contract, plan or transaction involving the investment of money in a joint venture that secures a reasonable return on the managerial or entrepreneurial efforts of others.

“Applying the Howey test is no easier than applying it to primary transactions (ie, token sales to investors by token issuers),” Jennings wrote. “In many ICOs, token issuers make clear representations and promises to investors that they will fund the proceeds from token sales and provide future returns to investors.” He warned.

Those cases were securities transactions, regardless of whether the instruments traded were digital assets or shares of stock. Case closed.”

If the asset is treated as a security, issuers face lengthy procedures, disclosure and financial requirements for registration. Strict penalties are often imposed for non-compliance.

In the year In a landmark case in July 2023, US District Court Judge Analisa Torres ruled that fintech company Ripple's sale of its XRP (XRP) token on US secondary markets or digital exchanges does not constitute a security offering. However, Torres ruled that the company's sale of XRP to US institutional investors met the Hawaii test for securities classification. Ripple is currently challenging the $2 billion fine imposed by the SEC.

Due to recent enforcement actions, some crypto companies have chosen to avoid the US market entirely.

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