Why We Love The SEC

Why We Love The SEC

Nth Round co-founder, Chris McConnell, writes about his visit to SEC headquarters in 2018.  There he met with Commissioner Hester Peirce to discuss the upcoming launch of Nth Round, to share details of Nth Round’s SaaS platform for facilitating liquidity, and to review relevant SEC requirements for compliance.

If you aren’t familiar with securities law for secondary sales of private securities, it turns out the the SEC provides clear rules of the road, and these regulations are not that difficult to meet.

A trip to remember

It was warm and sunny as our train pulled into Union Station.  There, we met with Linda, our tough-minded but diminutive securities lawyer.  After lunch, we walked next door to the new SEC headquarters. In the lobby, bulletproof shields stood ready (for god-knows what), and several guards sat in the center rotunda.  They packed serious heat. Linda was on a first-name basis with two of them, so that calmed us somewhat.

Upstairs, the first thing we noticed inside Commissioner Hester Peirce’s office was an impossibly tall flagpole with a silver eagle on top.  Bookshelves, plus portraits of various US presidents, gave the room a feeling of deep sobriety. But when Commissioner Peirce walked in, her cheerful smile immediately brightened the atmosphere.

After she explained that she could not provide us with any formal guidance – that was not her role – Commissioner Peirce began, “So, you are the ones who discovered the voting trust?  Tell me about that.” After explaining how we had read about it deep in back pages of the The 40 Act, Commissioner Peirce tilted her head slightly and said, “That’s impressive. Congratulations.”

Then she asked why and how we use blockchain.  We pulled out some diagrams and described how blockchain creates a walled garden, oversees it, permits only authorized participants, and records transactions faithfully.  Commissioner Pierce seemed keen on learning all about the technical details of our system.

The SEC’s mission

At the end she asked if we had any questions for her.  This was the big moment. Timidly, we mentioned The Exchange Act.  “Ah, I see. So your system accepts orders: bids and asks, right?” Yes.  “Do these orders interact, you know, match or cross?” No, they don’t even know about each other.  They just sit there, waiting to be accepted. “Oh, well then it’s not an exchange. Go out and change the world!”

Outside, we celebrated.

Here’s the thing: the SEC is on our side.  Their three-part mission is to:

  • Protect investors.
  • Maintain fair, orderly, and efficient markets.
  • Facilitate capital formation.

Linda Lerner, Nth Round Securities Lawyer, outside of SEC Headquarters in Washington D.C.

The SEC is enabling more liquidity for private stockholders

These all are good things, right?  It is true that many SEC regulations were written in the 1930s and 1940s, right after the Great Depression, when many investors lost everything and foul play was rampant.  That said, the SEC has updated many of their regulations, especially in conjunction with The JOBS Act and The FAST Act, which softened several rules, like Reg D and Section 12(g), introduced new fund-raising mechanisms, like Reg A and Reg CF, and codified private resale Section 4(a)(1½) with the new Section 4(a)(7).  In general, the SEC endeavors to modernize their regulations while continuing to provide prudent guardrails, protect unwitting investors, and dissuade fraudulent behavior.

Furthermore, the SEC has recently become proactive in exploring new ideas with leaders in all areas of finance, including cryptocurrency and blockchain.  The five SEC commissioners often give speeches on current policies and potential future directions. Hester Peirce, a.k.a. “crypto mom” is an active and sometimes provocative voice.  In her own words, “The U.S. securities markets have historically been the envy of the world; I do not want heel-dragging by the SEC in crypto to mar that well-deserved reputation.”

“Indeed, one of the issues on which I am committed to working with Chairman Clayton and my fellow commissioners is ways to unlock the deep potential of the middle of the country by ensuring that our securities laws do not inadvertently prevent people from investing in their own communities.  Accredited investor rules, for example, have a different effect in Ohio, where incomes pale in comparison to lofty coastal paychecks.” That’s awesome!

As another example, in early 2019 the SEC launched the Office of the Advocate for Small Business Capital Formation (https://www.sec.gov/oasb).  Nth Round has had wonderful conversations with Martha Miller, Director of the OASB.  She is keen to do everything possible to advance the interests of small businesses and their investors, including:

  • conducting outreach to solicit views on relevant capital formation issues
  • providing assistance to resolve significant problems
  • analyzing the potential small business impact of proposed regulations and rules
  • recommending changes to mitigate capital formation issues

Our promise to uphold SEC compliance

In summary, our interactions with the SEC have been uniformly positive.  Admittedly, we are “boy scouts” and “girl scouts” when it comes to compliance.  We appreciate the rules of the road, because they level the playing field and best assure that we all operate under the same assumptions and within the same guidelines.

So, keep going, SEC, we’re with you!

For a more detailed description of the SEC-compliant legal framework that supports the Nth Round platform, click here to read the whitepaper.

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