Proposed SEC Rule 195 Token Incubation Could Change the Industry

Commissioner Peirce Proposes Safe Harbor for Token Offerings
Token Safe Harbor Proposal

Commissioner Hester M. Peirce

Update: Here is an outline of the proposed rules

Any applicable digital asset will have three years after the token sale to prove if it is sufficiently decentralized and/or provide sufficient utility for the token not to be deemed a security.

In effect, Rule 195 proposes the following:

  • The creating company must undertake a good faith effort to build a decentralized and/or functional network as defined in the rule as Network Maturity
  • Provide certain disclosures on a publicly available website.
  • Offer and sell tokens to provide access to, participation on, or the development of the network.
  • Undertake in good faith to create liquidity for users by listing tokens on a compliant exchange.
  • File a notice of reliance with the SEC within 15 days of the first sale or distribution of tokens that triggers reliance on the rule.
  • The creating company must also provide certain disclosures regarding their identities and experience, the source code itself (if available), details about the project and its functionality or anticipated functionality and development timeline, specifics about the token economics, the intended use of proceeds, certain holdings of tokens or promises of tokens, sales by the company of 5% or more of their token holdings, prior token sales and where the token can be traded.
  • Tokens or SAFTs sold prior to the rule that relied on a valid exemption from the securities laws are eligible to use Rule 195 as long as they abide by its applicable provisions and will have the lesser of 3 years from the prior sale and 18 months from the enactment of Rule 195 to reach Network Maturity.
  • The rule requires liquidity of the tokens which will allow purchasers the opportunity to sell them to a third party.

The tokens are also required to:

  • Be created in response to the verification or collection of proposed transactions or pursuant to rules for the token’s creation and supply that cannot be altered by any single person or persons under common control.
  • Have a transaction history that is recorded and publicly available in a blockchain or similar data structure in which consensus is achieved through a verifiable process, and after consensus is reached, resist modification or tampering by any single person or group of persons under common control.
  • Be capable of being transferred between persons without an intermediary party.
  • Not represent a financial interest in a company, partnership, or fund, including an ownership or debt interest, revenue share, entitlement to any interest or dividend payment.

Of course, any digital asset offering must comply with anti-fraud laws as well as KYC/AML rules.