Techies who spot a promising cryptocurrency but don’t meet the legal thresholds to invest could soon get regulatory relief.
The U.S. House of Representatives Nov. 1 passed a bill (H.R. 1585) that would open up cryptocurrency and digital asset markets to a larger pool of investors. The bipartisan bill, introduced by Rep. David Schweikert (R-Ariz.), would broaden the definition of accredited investors who can buy unregistered securities, which would include many digital coins and tokens currently on the market.
Under the legislation, individuals whose education or career experience gives them background knowledge about such securities would be able to invest, even if their net worth doesn’t meet traditional requirements. Currently, people who want to invest in securities that are unregistered with the U.S. Securities and Exchange Commission must have an annual income of at least $200,000 or a net worth of over $1 million.
The bill does not yet have companion legislation in the Senate.
If the bill were to pass, the change could spur more investment in the digital asset markets. With more investors interested in their securities, token developers would have less incentives to consider committing fraud.
The use of initial coin offerings, or ICOs, has skyrocketed in 2017 as companies and individuals sell digital coins or tokens, often as a way to raise capital. The earliest investors have tended to be individuals with an extensive knowledge of the complex functionality of an asset, but who do not necessarily meet the wealth requirements.
This limitation has increased cases of securities fraud in ICOs, Vinay Gupta, CEO of Mattereum.com and a blockchain specialist, told Bloomberg Law in a recent video interview. To attract investors who don’t currently qualify, some token developers have classified their assets as utility tokens that can be exchanged for a good or service online. These classifications are one way developers have tried to avoid having to comply with securities law, he said.
But many of these tokens should really be classified as an equity, which requires compliance, Gupta said.
Technically savvy individuals who can navigate complex blockchain investments should be classified as accredited investors to promote legitimate, compliant digital asset sales, said Gupta, who’s based in London and also works as a venture capitalist.
The move could also draw more investment into other emerging technology fields, like virtual reality and artificial intelligence, by empowering the computer scientists and engineers who understand the fields best, he said.
“If we can figure out the right way to management that at regulatory level, I think we could continue to see these technically sophisticated investors drive investment in the areas which are notoriously hard to invest in because the technologies are so hard to understand,” Gupta said.
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