Baker Donelson Attorney Chris Sloan On SEC Probe: “This Was Coming Sooner Rather Than Later”

Bitcoin, Blockchain and the Law, Blockchain, FinTech, News, Regulation | March 5, 2018 By:

Chris Sloan is an attorney with Baker Donelson in Nashville and is deeply immersed in the blockchain and cryptocurrency communities there. He talked with Block Tribune about the recent SEC subpoenas of various companies, the Nashville community, and the outlook for the sector the rest of this year.

BLOCK TRIBUNE: Well, lots to talk about. Obviously, the SEC has started in earnest to investigate some cryptocurrencies regarding their ICOs. What’s your initial reaction?

CHRIS SLOAN: This was coming sooner rather than later based on the comments that the SEC’s been making over the past month or two. I mean, when the Chairman testified before Congress a couple of weeks ago and you can look up the exact quote, but it was something along the lines of, “I believe every ICO I’ve seen is a security. You can call it a coin but if it functions as a security, it is a security.”

Pretty much tells you everything you need to know about the SEC’s position on this issue and all these structures that lawyers and companies have been working on to try to emphasize the utility functions of the tokens and some even crazier structures over the last year just aren’t gonna cut it as far as avoiding security laws compliance in the U.S. So, I think the take away from everything we’ve heard from the SEC over the last couple of weeks is you need to treat this transaction as if it’s a security and go from there.

BLOCK TRIBUNE: What do you think’s going to happen as a result of the current probe?

CHRIS SLOAN: It’s hard to say because what’s the information that’s been coming out about the current probe are hard to pin down. I mean, there have been some reports saying it was sweeping and wide spread and that subpoenas were lobbed all over the place. There have been others suggesting that it’s not quite as broad in scope but it would not surprise me at all if some more cease and desist letters to tag onto the one they issued a few weeks ago come out of this. It’s very clear that they’re looking to actively regulate this area now.

BLOCK TRIBUNE: What do you think the overall effect will be upon the cryptocurrency industry and blockchain businesses in general? Will it be a chilling effect, where things won’t get started as quickly or is it a good thing?

CHRIS SLOAN: Well, yes and no. So, yes, it’s going to and already has had a chilling effect on companies trying to use token pre-sales or ICO’s as a fundraising mechanism. Because a number of companies over the past few years have tried to do that in a way that they believed wasn’t a structure that avoided any sort of security and the SEC’s basically said that’s not going to happen so I think one thing that’s gonna follow from that is, anyone that does attempt to use a token pre-sale for fundraising is going to have to treat it as a security. And now there’s a fairly widely used model for that with the SAFT that’s, actually, I think, a relatively sound structure. So, that’s on the ICO side, I think it will have a chilling effect and it’s gonna force people into that compliance box. I don’t think it’s going to have any effect on the other side of the marketplace in terms of blockchain applications more broadly, if anything, I’m very bullish on that. I mean, I think there’s all sorts of applications for blockchain that are going to become more and more widely adopted.

I mean, we know of several start-ups that are working on applications of blockchain in areas like health care, chain of title for real estate. There was just a big securities transaction involving IMG trading some foreign government securities using a blockchain structure that I think is a precedent that we’re gonna see more and more of so you’re gonna see a chill on using it for fundraising but it just means people are gonna have to work around that.

BLOCK TRIBUNE: Is it incumbent upon the SEC to speed up their process? Right now, it takes a couple years to get accredited for security offering. What do you see happening in that regard?

CHRIS SLOAN: Well, I mean, that’s not necessarily true. It really depends on the path you take. I mean, I think if you wanted to use a structure under Reg D or even Reg A Plus you can go down a path that won’t take nearly as long as something like an IPO or some other public registration process. So, I think you do have paths available to you but it will impact either who you sell to or how you run your process.

BLOCK TRIBUNE: Do you see anyone going to jail as a result of these probes?

CHRIS SLOAN: I guess it depends on the facts. I’d be surprised if anyone went to jail for a good faith if misguided attempt at structuring a deal in a way so that they felt it wasn’t a security. Now, look, if it turns out that there’s outright fraud involved, certainly it’s possible and the SEC has made it very clear that they believe that there is fraud risk in a lot of these transactions. So, it’s hard to say from what we know right now. If the facts turn up something like real fraud, yeah, I do think it’s very possible. But beyond that, I would be surprised if just a misguided but good faith effort ended up with jail. It might end up with a fine or some sort of censure but we’ll see.

BLOCK TRIBUNE: So, what do you see happening outside the U.S.? Right now various countries rather have come out and issued proclamations that range from the Draconian to just that they’re gonna work with other companies, what do you see happening?

CHRIS SLOAN: I mean, on the ICO side, it’s still kind of the Wild Wild West. We are starting to see more countries drifting towards the approach the FCC seems to be taking but there’s not a lot of guidance that’s wide spread or consistent. I mean, as far as blockchain generally goes, we’re seeing a lot of movements. We’re starting to see a lot of Chinese companies filing patents in this area, which is sort of a new approach for Chinese innovation but it signals that there’s a lot of interest in start-ups in China in the blockchain space. The European Commission has started some discussions and taken up some recent … Issued some recent comments on blockchain applications in Europe, so it’s still … The regulatory schemes are still not particularly well defined really almost anywhere but more and more activity.

BLOCK TRIBUNE: Is there a blockchain community in Nashville?

CHRIS SLOAN: Yes. Yes there is.

BLOCK TRIBUNE: Okay. How big is it? How many companies? How active is it? 

CHRIS SLOAN: It’s relatively nascent. I mean, there’s a large sort of media company in this space called BCT, which has run a conference for the past couple of years that’s drawn quite a few folks. Beyond that, it’s sort of loosely organized, it’s more of a word of mouth kind of community where different people are connected to the group in different ways. So, there’s not a … Other than the BCT and their conference, I don’t know that there’s a formal community beyond that but there’s a lot of people active in the space.

BLOCK TRIBUNE: Venture capitalists have been down the last couple of years because of the rise of the ICOs. What do you see happening in their sector now that this probe is under way?

CHRIS SLOAN: Well, I think two things. I think forcing the ICOs back into the securities box will have the effect of deterring some companies from pursuing that as a fundraising strategy, which will work to the benefit of VCs because it will drive those companies back to the more traditional fundraising structures that VCs do but the flip side of that is there are also a number of VCs that are investing in cryptocurrency deals and blockchain deals. I mean, I know of those funds that actually have invested in cryptocurrency as part of their investment strategy and there’s some prominent VCs like Tim Draper who have made hundreds of millions of dollars by buying cryptocurrency and Sheriff’s auctions and things like that. So, I think you’re also going to see the VCs starting to build that into their portfolio.

BLOCK TRIBUNE: There was a survey that came out the other day that said, basically, that half of all start-ups are failing in this sector, are things moving too quickly because people are jumping on the bandwagon or is that naturally most start-up businesses fail anyway? How do you see it shaking out?

CHRIS SLOAN: Yeah, it’s too early to say because most of those start-ups haven’t been around long enough to know if they’re gonna succeed or fail but I would tell you that half failing is way undershooting the norm. I mean, if you look at an average group of ten tech or tech oriented kinds of start-ups, eight or nine of them are gonna fail, if not more. So, if half are successful, that’s gonna be a huge win but I think the real answer is just you need a good five year window of significant activity to really have that kind of data and I just don’t think there’s been enough activity until the last couple of years to really be able to get some meaningful data out of that.

BLOCK TRIBUNE: This particular survey that I’m referring to said that these were 2017 start-ups and half of them are already gone so …

CHRIS SLOAN: That doesn’t surprise me at all.


CHRIS SLOAN: But I also think that’s relatively normal. 

BLOCK TRIBUNE: Yeah. So, put on your prognostication hat, what do you see happening throughout the rest of 2018 and maybe beyond, especially with the SEC probe sort of in its early stages?

CHRIS SLOAN: Well, I think on the fundraising front, we’re gonna see more companies that are intending to build tokens focus on a true utility token as opposed to some of these efforts that really were just securities disguised as utility tokens. So, I think we’re gonna see companies that want to issue tokens focused on something that really does have true utility but I think we’re gonna see a lot of those companies that want to use tokens for fundraising going with the SAFT. I think that’s a model that is sound. There’s an easy securities compliance path to it and it’s very similar to what companies use for convertible notes or safes and, in fact, it’s derived from the safe convertible equity structure. So, I think we’ll see a lot more of that as far as blockchain or cryptocurrency more widely. The cryptocurrency side, I think a lot is gonna come down to some of these payment networks that are just now being deployed and how widely or successfully they’re done.

The big knock on the cryptocurrencies has been the relatively slow speed with which they can process transactions in real time and so it has been difficult to deploy a network that allows people to buy a cup of coffee with a cryptocurrency and there are now these payment networks like Lite pay and Lightning and some of these other things that’ll make it easier and in theory faster. So, if those are successful, then I think you see the cryptocurrency market grow and then there’s innovation around blockchain more widely. We’re seeing a lot of activity in health care, for example. I think there’s myriad uses of blockchain in health care. I think that’s an area over the next year or so that we’re gonna see a huge increase in investment, both in the start-up space and in the larger providers and insurance companies.

BLOCK TRIBUNE: Nashville’s known for its health care, but its also known as a great entertainment town. Do you see a lot of entertainment start-ups springing up out of Nashville right now?

CHRIS SLOAN: Yes, we do. Our music tech scene is exploding right now. Over the last few years, the last really five to ten years, the traditional entertainment businesses have become much more innovation oriented and so that’s led to more of an alignment of resources for music tech start-ups and other sort of digital media entertainment start-ups than we’ve had in the past so there’s been a lot of activity over the last five years.

BLOCK TRIBUNE: Do a lot of companies approach you saying that they want to do a blockchain and do you ever advise them that this is not a blockchain company, if you follow what I’m asking?

CHRIS SLOAN: Do you mean in terms of going with a fundraising approach or just blockchain generally?

BLOCK TRIBUNE: Well, just there’s a lot of companies that claim, “Yeah, we’re gonna go onto a blockchain.” But there’s no need for them.

CHRIS SLOAN: I have seen that and I analogize that to what people were saying with Big Data five or ten years ago. I mean, five years ago every start-up pitch that you saw they would talk about their product and what they’re actually offering but somewhere in the pitch inevitably there were gonna be, “And we’re gonna have all this data that we’re gonna figure out how to monetize later.” Right? So, I feel like this is the same thing five years later. I think lots of companies are going to have a core product offering and they’re gonna say, “And by the way, we have these blockchain applications that we can build.” Time will tell how many of them will actually come to fruition. I don’t think it hurts if there’s a viable blockchain application of your product to list that as a future product offering that you might develop but we have not seen very many companies come to us yet and say we’re leading with a blockchain offering, where I though it didn’t make sense to do that.

BLOCK TRIBUNE: Are you somebody who believes in the long term outcome for bitcoin, or do you see other coins coming along that will supersede it eventually?

CHRIS SLOAN: Yeah, you’re talking about what the community calls the flippening, where something like ether … It’s market cap exceeds bitcoin. I don’t think that’s going to happen any time soon, maybe not ever just because bitcoin’s so dominant and so widely established but I do think you’re gonna see some erosion in the market cap by some of these other coins like bitcoin and Doge because they have functionality that bitcoin hasn’t been able to implement yet. If Lite pay takes off, which is a big if because they got off to a rocky start this week, Litecoin could gain a lot. We’ll see. I actually do think there’s still quite a bit of room for bitcoin to grow in value over time. I don’t see any of the other coins, at least that are available right now, overtaking them but if I were that good of a prognosticator on bitcoin I would have bought 10,000 bitcoins ten years ago and we wouldn’t be having this conversation.