Crypto and equity crowdfunding (Reg CF) are two relatively new concepts that are combining to create new economic models that could overtake current economic paradigms.
Both decentralize older models of value transfer and capital raising. Crypto began with a pseudonymous programmer apparently fed up with the current financial system and trying to create a “new electronic cash system that’s fully peer-to-peer, with no trusted third party.” From humble beginnings in an obscure computer programmer listserv, crypto has blossomed into a multi-trillion-dollar industry. In 2021, the overall crypto market burst from $500 billion to almost $3 trillion.
Reg CF originated from Title III of the JOBS Act of 2012. The JOBS Act, which has been a deregulatory success recently celebrated its 10-year anniversary. JOBS Act provisions Reg A+ and Reg CF opened private-company capital raising beyond the world of venture capitalists and angel investors to the public. After a slow start Reg CF has blossomed, aided by deregulatory moves from the Securities and Exchange Commission (SEC) in the Trump administration’s waning days.
Source: Crowdfund Capital Advisors
Now new research from Crowdfund Capital Advisors (CCA), which curates Reg CF data, shows these two distinct but related industries are starting to coalesce. According to CCA:
- Year to date, 28 blockchain/crypto issuers have raised $31.7 million from more than 28,000 investors
- Since 2016, 131 blockchain/crypto issuers have raised $62.7 million
- The enterprise value of all blockchain/crypto issuers is $2 billion.
- The valuation of first quarter blockchain/crypto issuers was up 230 percent over 2021
While these numbers are still relatively small, the potential to create wealth for ordinary investors and economic prosperity for the country is limitless.
For equity crowdfunding and crypto to meet its full potential, Congress needs to remove some current roadblocks that hinder growth while providing little investor protection.
First, crypto under the leadership of SEC Chairman Gary Gensler has become a regulatory black hole. His enforcement-only leadership has frustrated everyone from crypto entrepreneurs to members of Congress to the public.
Congress could start by removing crypto projects from the definition of “investment contract” and beyond SEC jurisdiction. This would allow the token economy to thrive absent the heavy hand of securities regulation.
For crypto issuers that wish to raise capital by issuing company equity via tokens, these fall within the straightforward definition of “security.” Issuers should conduct them through registration or an exemption like Reg CF.
Here again, Congress could simplify the process by further deregulating Reg CF.
First, it could make security tokens along with other Reg CF securities instantly tradable. Currently, Reg CF investors must wait one year to trade their tokens (with limited exceptions).
Second, Congress should preempt secondary trading from state-level compliance. The SEC previously considered such preemption in its Trump-era deregulation but demurred—likely due to pressure from the North American Securities Administrators Association, which opposes any form of state preemption—stating that it “merits careful consideration and an opportunity for market participants to receive notice and comment on a specific proposal.”
Such proposals are unlikely under the current SEC regime. However, instant liquidity is simply a prerequisite for any crypto-related venture. As Rep. Patrick McHenry (E-NC) has stated, this is itself a form investor protection that allows “individuals whose financial situation has changed to exit … investments in times of need.”
These changes would spur an explosion in decentralized, crypto-centered economic activity, all under federal anti-fraud protections. New economic models are possible and fast approaching. They can catalyze unprecedented prosperity ,but they will not fully thrive without help from Congress.