Blog

By Michael W. Zarlenga, Esq.*

On February 15th, I flew into Dallas Fort Worth Airport to attend the Bitcoin, Ethereum & Blockchain Superconference at the DFW Marriott.  Over two days, there were a series of speakers and break out discussions on everything from investing in cryptocurrencies to the current state of regulation.  

The conference opened with remarks from Tim Draper, a venture capitalist and visionary whose VC funds have invested in start-ups like Skype, Hotmail, Tesla, Baidu, Theranos, Athenahealth, Solar City, Box, TwitchTV, SpaceX, Cruise Automation and Parametric Technology.  He is credited with coining the phrase "viral marketing".  Earlier in my career, I was responsible for doing much of the fund formation work for VC fund Draper Fisher Jurvetson and some of its affiliate funds, such as Draper Atlantic, so I am very attune to the insights of Tim Draper.  One comment, or rather prediction, caught my interest, and summed up why many of the people attended the conference. The morning of Friday, February 16, 2018, Tim predicted that if you walk into a Starbucks Coffee five years from now and tried to pay with cash, the Barista will laugh at you.

As an attorney, I also had an interest in learning the latest thoughts of others in my profession and the executives of the major players in the industry. I was especially interested in coin and token offerings.  As I have been espousing for months, the industry finally seems to be coming to grips with the fact that most coin and token offerings in the United States or to a U.S. citizen are going to be regulated by the Securities and Exchange Commission as an offering of a security. The path for a purely utility token has become extremely narrow.

On the cryptocurrency front, the speakers tended to stress that the Anti-Money Laundering and Know Your Customer (AML-KYC) rules are often being overlooked. Additionally, rules regulating money or currency exchanges and money transfer businesses are also taking a back seat. Yet, on an individual basis, these rules are the traps for the unwary.

After talking with many of attendees, my biggest takeaway was that the blockchain and cryptocurrency space has reached the point at which regulators are no longer willing to overlook bad actors. Regulators are expecting people to comply with the law and are no longer going to just give out slaps on the wrist. Having quality legal counsel familiar with the issues will be key moving forward. Bergstrom Attorneys continues to monitor developments and advise clients in the cryptocurrency, coin and token offering, and distributed ledger network arena.  Contact us to discuss how we can help achieve your goals.

* Michael W. Zarlenga is Of Counsel to Bergstrom Attorneys, PLLC.  Mr. Zarlenga has extensive securities law experience, including both public and private placements of securities totaling in excess of $2 billion.  In addition, Mr. Zarlenga has advised clients ranging in size from start-up companies to Fortune 500 in such diversely regulated fields as biotech, hi-tech, financial services, and insurance.    

Deer antlers, sports mascots, photographs, music . . . all features found in the growing number of customized caskets, according to a recent article in the Wall Street Journal. Perhaps this article will inspire you. Unfortunately, any reminder of mortality leads many people to avoid estate planning altogether.  That's why Bergstrom Attorneys have two important messages.

First, an estate plan should be designed as much to protect you in your life time as it is designed to handle the inheritance you leave at the end of your life. 

Second, an estate plan is equally relevant to everyone, regardless of age, health, or wealth.

Whether you're rich or poor, young or old, you should have durable power of attorney and an advance medical directive, in which you appoint your loved ones as your agents. Without these documents, your family or friends would have great difficulty coming to your aid in an emergency, especially if you're incapacitated or unavailable to handle your own affairs.

Similarly, your last will and testament would appoint the personal representative of your estate and guardian of your children. If you fail to make these decisions in your will, a court of law will decide for you. 

Additionally, a trust can appoint a trustee to protect your assets to support you, and later your trust could enable your beneficiaries to inherit without probate court proceedings. Your trust can also include a provision to create a new trust to hold assets for a beneficiary until he or she is old enough to manage the assets inherited through your trust. 

Make no mistake about it, estate planning is for the living as much as it is for the departed. We hope everyone finds what will inspire them to create their own estate plan. Whether it's a custom casket like the ones described in the Wall Street Journal article, or the desire to have an emergency plan in place in case you're injured or ill, Bergstrom Attorneys are ready to address your concerns in goals in your estate plan. Contact us to learn more about our services. 

By:  Michael W. Zarlenga*

In my December 13, 2017 Blog, I asked whether statements in early December by the Director of the Securities and Exchange Commission's (SEC) Division of Investment Management foreshadowed possible SEC intent to regulate the trading of tokens and other cryptocurrencies in a secondary market and, therefore, held by publicly traded funds.  As expected, on January 18, 2018, Director Blass issued Staff Letter: Engaging on Fund Innovation and Cryptocurrency-related Holdings.  The letter sets forth a number of questions the Division of Investment Management poses regarding the administration of a fund which holds cryptocurrency or cryptocurrency related assets.  The letter, in short, institutes a moratorium on registering cryptocurrency funds and prevents existing funds from holding substantial amounts of cryptocurrency or cryptocurrency related assets.  The letter states:

Until the questions identified above can be addressed satisfactorily, we do not believe that it is appropriate for fund sponsors to initiate registration of funds that intend to invest substantially in cryptocurrency and related products, and we have asked sponsors that have registration statements filed for such products to withdraw them.  . . . If a sponsor were to file a post-effective amendment under rule 485(a) to register a fund that invests substantially in cryptocurrency or related products, we would view that action unfavorably and would consider actions necessary or appropriate to protect Main Street investors, including recommending a stop order to the Commission.

Mutual funds and exchange traded funds must value their assets each business day in order to strike a net asset value.  A big concern of the SEC is the basis for the valuation of fund assets.  Valuation plays a key role in everything from disclosures regarding fund performance to determining the daily price for purchases.  In light of the lack of reliable public information regarding most cryptocurrency assets (which would allow a fund to value these assets), the SEC has serious questions regarding how a fund holding these assets will strike an accurate net asset value.  Most of the questions, however, seem to culminate in the ultimate motive of the SEC, namely preventing potential manipulation of the market for these funds.

The SEC also released the remarks of SEC Chairman Jay Clayton from a speech he delivered at the opening of the Securities Regulation Institute on January 22, 2018.  He strongly admonished securities professionals involved with cryptocurrencies.  He stated:

My first message is simple and a bit stern. Market professionals, especially gatekeepers, need to act responsibly and hold themselves to high standards. To be blunt, from what I have seen recently, particularly in the initial coin offering ("ICO") space, they can do better.

These remarks are not surprising.  The SEC has had to step in to prevent a number of unregistered securities offerings involving tokens and coins. In December, Chairman Clayton threw the securities professionals a bone by stating the obvious, namely the preeminent question for all ICO market participants is whether or not the coin or token is a security.  Chairman Clayton's current comments seem to announce the SEC's disappointment in the legal profession for failing to properly advise clients.  The legal analysis set forth with regard to The DAO (a investor-directed virtual venture capital fund operating as a decentralized autonomous organization) and the further action taken recently regarding Munchees, Inc., highlight Chairman Clayton's view that a competent securities professional should have no problem determining what is or is not a security.  Further, he believes that too often "lawyers appear to provide the 'it depends' equivocal advice, rather than counseling their clients that the product they are promoting likely is a security."

Among Federal and state agencies, the SEC is particularly interested in the topics of cryptocurrencies and other Blockchain assets.  Chairman Clayton has announced that he is putting the SEC "on high alert for approaches to ICOs that may be contrary to the spirit of our securities laws and the professional obligations of the U.S. securities bar."  The future regulatory landscape is anything but clear.  Bergstrom Attorneys continues to monitor developments and advise clients in the cryptocurrency, coin and token offering, and distributed ledger network arena.  Let us know if we can help you.

* Michael W. Zarlenga is Of Counsel to Bergstrom Attorneys, PLLC.  Mr. Zarlenga has extensive securities law experience, including both public and private placements of securities totaling in excess of $2 billion.  In addition, Mr. Zarlenga has advised clients ranging in size from start-up companies to Fortune 500 in such diversely regulated fields as biotech, hi-tech, financial services, and insurance.

"Documents You Need When a Child Turns 18" is a recent article by the Wall Street Journal, and it reinforced a belief Bergstrom Attorneys has embraced: estate planning is relevant to everyone, regardless of age, health, or wealth. The fact is, an 18-year-old is no longer a child, and in many respects parents lose their rights in decisions or information concerning their adult child, whether it relates to an emergency or report cards.

In summary, the article recommended the following for parents of 18-year-olds:

• Health-Care Power of Attorney: also known as an Advance Medical Directive, this legal instrument allows an agent to make health care decisions for a principal who cannot make his or her own decisions due to physical or mental illness; an adult child would thereby appoint his or her parents to help in a medical emergency. If you are the parent of an out-of-state college student, one Health-Care Power of Attorney should be drafted based on the state law where the child studies, and another based on your home state's law.

• HIPAA Authorization: HIPAA regulations prohibit disclosure of medical records, and would therefore deny parents' access to such information for their 18+ child. Parents should obtain a blanket HIPAA authorization from their adult child if they want the possibility to become apprised of their adult child's health.

• Financial Power of Attorney: also known as Durable Power of Attorney, this documents appoints the adult child's agent to handle financial matters. This could be a crucial requirement if your 18-year-old has a medical emergency and can no longer manage his or her own financial affairs. 

• Education Record Release: Because of the Family Educational Rights and Privacy Act, or FERPA, parents have no right to see their adult child's report card, unless the child signs an Education Record Release giving parents access to report cards, transcripts, and financial information at their academic institution, including universities. Under FERPA, your 18-year-old may waive their FERPA rights to allow their parents access to such academic records.

Typically parents contact us to request powers of attorney as part of their own estate plans. We consider it our job as their lawyer to advise them of often overlooked legal issues, including estate planning services tailored for their 18+ year-old dependent child. It's common for our clients to respond by saying their child is young and healthy, but they soon appreciate how estate planning is contingency planning to prepare for the unexpected, including those cases when a child, who might legally be an adult, still needs to count on mom or dad in an emergency. It would be tragic if parents were denied the possibility of helping their child because they lacked the legal documents described in this informative article.

Contact Bergstrom Attorneys to discuss your need for an estate plan for each member of your family.  

The Federal Bar Association has produced a webinar entitled, "Introduction to Blockchain Systems & Challenges for Advising Clients."  The program was presented by Matthew Bergstrom and Michael Zarlenga, both lawyers from Bergstrom Attorneys PLLC. The presentation first aired live on December 15, 2017, and it will be rebroadcast throughout 2018 with live Q&A with Bergstrom and Zarlenga. 

The webinar would be of interest to anyone concerned with the legal issues of blockchain technology from a legal, business, and policy perspective. Lawyers may receive CLE credit by completing the webinar. 

This program is a basic introduction to distributed ledger systems or Blockchain technologies. The most notable application of a blockchain is Bitcoin. But Blockchain systems have the potential to revolutionize the way business is done and lawyers need to be prepared to advise clients. This course will provide attorneys with a basic understanding of the Blockchain, expose attorneys to the basic terminology they should know, discuss smart contracts and the challenges they pose, and address some of the legal and regulatory challenges to early adopters of Blockchain systems. This is a Blockchain 101 course. Some of the topics that will be discussed include:

Key topics to be discussed:

• What is a Distributed Ledger System or Blockchain?

• What is a Token?

• What is a Smart Contract?

• What is a DAO?

• What is an ICO?

• Challenges of Applying Blockchain Systems to a Papered World.

• Challenges of Advising Early Adopters

For more information, visit this link. 

By:  Michael W. Zarlenga*

On December 11, 2017, the Securities and Exchange Commission (SEC) made public three important documents related to ICOs and cryptocurrency ecosystems.  The first was the public release of an order instituting a cease-and-desist proceeding against Munchees, Inc., a restaurant review iPhone application.  Munchees, Inc. engaged in an ICO of MUN, coins which closely resembled utility tokens.  However, using the U.S. Supreme Court’s analysis in SEC v. W.J. Howey Co., the SEC classified the MUN as investment contracts.  As the SEC discussed in The DAO Report, tokens, coins, or other digital assets issued on a Blockchain may be securities under Federal law.  If they are securities, issuers and others who offer or sell them in the United States must register the offering and sale with the SEC or qualify for an exemption from registration.  Quoting two other U.S. Supreme Court Cases, United Housing Found., Inc. v. Forman and Tcherepnin v. Knight, the SEC noted that “In analyzing whether something is a security, form should be disregarded for substance, and the emphasis should be on economic realities underlying a transaction, and not on the name appended thereto.  In other words, calling something a Utility Token does not make it so in the eyes of the SEC or the Federal securities laws.

The second issuance by the SEC was a longer statement on cryptocurrencies and ICOs.  It was a statement from SEC Chairman Jay Clayton.  Chairman Clayton stated:  “A key question for all ICO market participants: ‘Is the coin or token a security?’ As securities law practitioners know well, the answer depends on the facts.”  Chairman Clayton went on to provide an example of the difference:

For example, a token that represents a participation interest in a book-of-the-month club may not implicate our securities laws, and may well be an efficient way for the club’s operators to fund the future acquisition of books and facilitate the distribution of those books to token holders.  In contrast, many token offerings appear to have gone beyond this construct and are more analogous to interests in a yet-to-be-built publishing house with the authors, books and distribution networks all to come.  It is especially troubling when the promoters of these offerings emphasize the secondary market trading potential of these tokens. Prospective purchasers are being sold on the potential for tokens to increase in value – with the ability to lock in those increases by reselling the tokens on a secondary market – or to otherwise profit from the tokens based on the efforts of others.  These are key hallmarks of a security and a securities offering.”

As with the Muchees, Inc. cease-and-desist order, the example points out that the fact that if a token is going to increase in value based on the future efforts of others, it is most likely a security.  This position should not be surprising given the SEC’s position that a SAFT (Simple Agreement for Future Tokens) is an investment contract and therefore, a security.

The final public release by the SEC is a transcript of a speech last week by Dalia Blass, the Director of the SEC’s Division of Investment Management.  While Ms. Blass spent very little of her speech on cryptocurrencies, Ms. Blass did note the following:

We also continue to think about new innovations in asset management.  For example, we have seen several filings for registered funds that would hold cryptocurrency.  As with any new product, there are questions to ask.  For example, would retail investors have sufficient information to consider these products and to understand the risks? . . .  When thinking about cryptocurrencies and other blockchain offerings as fund assets, are differences in their features important?  How would these funds fit into the existing regulatory scheme?  What regulatory structure or structures apply to the market for the underlying instrument?  We will be discussing these questions with you as we work through these filings.

Is this a foreshadowing that the SEC is looking to regulate the secondary markets for utility tokens or coins?

As with other Federal and state agencies, the SEC is very interested in the topics of cryptocurrencies and other Blockchain assets.  The future regulatory landscape is anything but clear.  Bergstrom Attorneys continues to monitor developments and advise clients in the cryptocurrency and distributed ledger network arena.  Let us know if we can help you.

* Michael W. Zarlenga is Of Counsel to Bergstrom Attorneys, PLLC.  Mr. Zarlenga has extensive securities law experience, including both public and private placements of securities totaling in excess of $2 billion.  In addition, Mr. Zarlenga has advised clients ranging in size from start-up companies to Fortune 500 in such diversely regulated fields as biotech, hi-tech, financial services, and insurance.