Section 12(g) and Offshore Tokenized RWA Offerings
Avoiding SEC registration requirements
All views are my own. These notes are for informational purposes only and not legal advice.
This short note is tailored to crypto asset offerings that are at legitimate risk of being deemed a security in the US, including onchain yield products (tokenized treasuries, yield-bearing stables, etc.), certain non-fiat backed stables, and other financially-oriented RWA products. For ease of reference, I will refer to all such at-risk digital assets as “Tokenized Securities.” Having said this, all foreign token issuers utilizing Reg S to avoid the application of US securities regulations should keep the 12g registration requirement, and its foreign issuer exemption, in mind.
It should also be noted that many issuers of Tokenized Securities are investment companies and therefore subject to ‘40 Act requirements (which I will not discuss in this note), independent of securities offering compliance requirements.
Registration requirement under Section 12(g) of the Exchange Act
An issuer must register a class of securities under the Exchange Act if all three of the following conditions are met:
the issuer has over $10 million in assets as of the end of its fiscal year
the number of record holders of such equity securities is either 2,000 persons or 500 persons who are not accredited investors or greater worldwide and
the number of its US resident holders is 300 or more.[1]
To restate, if the above conditions are met (and no exemption is available), then the issuer could be required to register the crypto asset offering with the SEC.
Tokenized Securities offerings tend to fall into one of two broad categories: (i) offerings by a private fund utilizing a “traditional” Reg S/144A structure whereby tokens are distributed onto a permissioned network to investors/institutions who qualify as both accredited investors and qualified purchasers; and (ii) offerings by foreign issuers utilizing Reg S to non-US investors.
The first category of issuers (private funds) generally manage 12(g) investor limits by controlling access to the crypto asset and limiting secondary sales to other issuer-permissioned investors already in the network.
The second category (“traditional” crypto issuers of assets on a permissionless network) can manage 12(g) limitations, to some extent, via Reg S offering limitations- namely, distribution via offshore CEXs that exclude US users by KYC and IP address blocking. The potential vulnerability lies in issuer-supported liquidity of DEXs (and potentially any defi platform) that can be freely accessed by US IP-addresses. Issuers of permissionless Tokenized Securities relying on Reg S (especially if DEX/defi liquidity is supported) should be qualified foreign private issuers (“FPIs”) which are entitled to the self-executing exemption to 12(g) discussed below.
Exemption to 12(g) registration for foreign private issuers
While the 12(g) thresholds are relatively low, FPIs (see my Reg S guide for a detailed discussion on FPIs) can take advantage of an automatic, self-executing exemption from registration under Rule 12g3-2(b) if the following three conditions are met:
The FPI is not required to file reports under Exchange Act Sections 13(a) or 15(d)
The FPI maintains a listing of the subject class of securities on one or more exchanges in non-U.S. jurisdictions that comprise at least 55 percent of its worldwide trading volume (its “Primary Trading Market”) and
The FPI publishes in English on its website (or through an electronic information delivery system generally available to the public in its Primary Trading Market) information that:
It has made public or been required to make public pursuant to the laws of the country of its incorporation, organization or domicile
It has filed or been required to file with the principal stock exchange in its Primary Trading Market on which its securities are traded and which has been made public by that exchange or
It has distributed or been required to distribute to its security holders.
Potential 12g3-2(b) Issues for FPI of Tokenized RWA
Maintaining a Primary Trading Market outside of the US
Likely to be the most unclear and challenging requirement for all foreign token issuers is the non-US Primary Trading Market obligation. This is really a compound element that first requires the FPI to maintain a listing on a “securities exchange” in a non-US jurisdiction. While there is no guidance on this topic with respect to tokens, given the SEC’s current actions against Coinbase, Kraken and Binance, which, among other things claim all three to be operating unregistered securities exchanges, it seems reasonable to conclude that listing a token on at least one offshore CEX satisfies the non-US securities exchange listing requirement. Where, however, a token trades only its native network, on defi platforms (and perhaps DEXs), or OTC, then an FPI may be unable to satisfy this requirement.
Additionally, while 12g3-2(b)(1)(ii) references the maintenance of a listing in “one or more” non-US jurisdictions, the legislative note to 12g3-2(b)(1) makes clear that the 55% global trading volume requirement must occur (as of the issuer’s most recently closed fiscal year) within one or two non-US jurisdictions. This creates the peculiar potential scenario where a strong horizontal expansion into multiple foreign jurisdictions results in a FPI losing the exemption and technically being required to register a token with as few as 300 US holders (even if the token trades on no US exchange).
Required Non-US Disclosures
Examples of the types of disclosure required by 12g3-2(b)include:
results of operations or financial condition;
changes in business;
acquisitions or dispositions of assets;
the issuance, redemption or acquisition of securities;
changes in management or control;
the granting of options or the payment of other remuneration to directors or officers; and
transactions with directors, officers or principal security holders.
The rule notes that “[a]t a minimum, a foreign private issuer shall electronically publish English translations of the following documents required to be published under paragraph (b) of this section if in a foreign language:
Its annual report, including or accompanied by annual financial statements;
Interim reports that include financial statements;
Press releases; and
All other communications and documents distributed directly to security holders of each class of securities to which the exemption relates.” (emphasis added) (12g3-2(b),Note 3 to paragraph (b)(1)).
Non-Reporting company requirement.
FPIs intending to invoke 12g3-2(b) must not have Exchange Act reporting obligations which generally arise as a result of a US public offering of securities, a listing on a national US securities exchange, or voluntary registration under the Exchange Act.
[1] Exchange Act Section 12(g)(1); Exchange Act Rule 12g3-2(a).