Robin Sosnow (head shot)

Robin Sosnow on the Legal Landscape of Digital Securities and the SEC’s Second No-Action Letter on Pocketful of Quarters

Robin Sosnow, founder and principal of Sosnow & Associates PLLC, an innovative, boutique legal practice in New York City, graciously offered to share her industry knowledge with digitalsecurities.com

In our interview, Sosnow provided keen insights on the legal aspects of the constantly evolving Digital Securities space—an industry many do not understand. We discussed a range of topics from why a business should choose a Reg A+ offering and red flags in clients to her thoughts on the SEC’s no-action letter on Pocketful of Quarters and much more.

Sosnow is also a co-founder of the Digital Securities Law Group, another New York City-based joint venture legal practice focused specifically on the blockchain industry.

Sosnow’s mission is to support the next generation of entrepreneurs with quality and cost-effective legal services. In practice, her core focus is to service issuers, platforms, and broker-dealers in pursuing alternative financing strategies. She is a regular speaker at FinTech events with recent appearances at OTC Markets, KoreConX KoreSummit, the Security Token Summit II, and OnChain19.

Robin Sosnow
Robin Sosnow, founder and principal of Sosnow & Associates PLLC

What is the legal process for a start-up to offer a Reg A+ Digital Security?

First and foremost, conducting an honest evaluation as to why Reg A+ is being selected and whether it is the most strategic option for the businesses’ objectives is key.

  • Since only two Reg A+ digital asset offerings have been qualified at this point in time, the SEC review process may take significantly longer than if it were in a legacy securities offering, and therefore not be viable for the business at hand.
  • The “all in” costs of utilizing the Reg A+ exemption are also significantly higher than working with other private company exemptions, and therefore a realistic cost/benefit analysis should be evaluated. Notably, if retail investor participation is the so-called “selling point” of Reg A+, US domiciled companies can also look to Regulation Crowdfunding, which can provide retail investor exposure, within limits, at a fraction of the cost.
  • Finally, only certain US and Canadian entities are eligible to utilize this JOBS Act exemption and should be determined to do so at the outset with the assistance of specialized counsel.

Being mindful of these threshold topics is essential.

If a company is determined to utilize Reg A+, it should begin by assembling its team, inclusive of legal counsel, broker-dealer services, accounting, and last but not least, marketing. Each service provider will need ample time to prepare the company for pre- and post-qualification deliverables.

From a purely legal perspective, beyond addressing the threshold topics addressed above, legal counsel will guide the Reg A+ issuer through the diligence, disclosure, broker-dealer/FINRA, and SEC review processes. Preparation of the issuer’s offering materials can be expected to take anywhere from 1 to 2 months, depending on how organized the company is and how concrete the company’s plans are at the time of counsel’s engagement. Part II of Form 1-A, the so called “Offering Circular,” a legal disclosure document that provides investors with relevant information pertaining to the offering, is by far the most time consuming “deliverable,” both for attorneys and their clients.

After the submission of the Form 1-A, the SEC reviews the Form 1-A resulting in a “question-and-answer” process between the SEC and issuer’s counsel which sometimes can take up to six months (albeit longer, if ever, in the case of tokenized Reg A+ offerings), eventually leading to the qualification of Form 1-A. Upon qualification, issuers are allowed to commence selling their unrestricted securities under Reg A+. Of course, qualification cannot be guaranteed.

What do you look for in a client? What are some red flags?

We work hard to help every entrepreneur eager to bring his or her business to the next level in a compliant manner. Behind every business is a story, fueled by real life people that differ in the way they interact, what they’re motivated by, and how quickly they seek to execute. This diversity keeps us on the tips of our toes, and we work to accommodate every client’s vision to generate the best outcome possible. When business leaders show a disregard for the corporate and securities laws that apply to their plans, the red flags go up.

Are there any red flags investors should look for when prospecting a Digital Securities Offering?

It should go without saying that investors should conduct diligence on any investment opportunity they are presented with and are considering participating in. In conducting diligence on a potential investment opportunity, its essential to review the company’s team, business plan, terms of the security being offered, historical performance, financial condition, and risks. If there is no offering memorandum available, beware. The same principles apply to traditional investment decision making.

Consulting with one’s trusted advisors, whether that be legal counsel, investment advisors, tax advisors, or other consiglieres is always sound advice. This rule of thumb applies in the DSO world too. Additionally, the SEC provides significant guidance for the investor community and has created FinHub to assist those seeking specific information relating to blockchain. See https://www.sec.gov/finhub for more information.

What does the SEC’s second no-action letter mean for the world of blockchain?

The second no-action letter, Pocketful of Quarters, advocated by a very good friend of mine, Lewis Cohen, Esq., is a huge and important step forward for the entire blockchain industry. It’s the first ERC-20 public blockchain token offering to receive no action relief. In essence, it shows that the SEC supports innovation and is willing to acknowledge that certain offerings of blockchain tokens are not in fact securities offerings.

For sophisticated market participation to ensue, compliant pathways to launch digital assets in the US, including cryptocurrencies, platform tokens, and consumptive tokens, must be available. The SEC has now again demonstrated their commitment to collaboration. It’s a moment to celebrate.

How do you stay informed? Any favorite news outlets or blogs that you follow?

I follow a bunch of WhatsApp groups, blogs, and news websites that keep me up to date. My team consolidates the resources that we find most useful each week into our firm’s CrowdCrypto Newsletter. Some very thoughtful resources we routinely review include CoinDesk, Cointelegraph, CrowdfundInsider, Jor Law’s Tokenization of Securities group on LinkedIn, and, of course, the WSJ and Forbes.

We’re also a big fan of Securitize’s newsletter, The Protocol, which highlights recent digital securities issuers and key events as they happen in the digital securities marketplace.

How do you navigate the legal landscape of a framework as new as blockchain and cryptocurrencies?

Law is created and put into practice through societal processes. This describes very well the challenges arising from a legal perspective. Our federal and state securities laws, as well as courts and governmental authorities, only recently have begun to contemplate how blockchain technology, digital securities, or cryptocurrencies may fit into the framework of our current securities laws and regulations.

As a result, in a step-by-step process, politicians, regulators, and lawyers are challenged with applying ‘dated’ legal frameworks to new technologies, and contemporaneously mandated to quickly develop a new framework to create an environment of increased legal certainty.

Personally, this has been an unbelievably rewarding practice area. I’m continuously challenged to think creatively about the intersection of law, innovation, and business in the increasingly digital world in which we all live.

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