Exemptions, and the conditions that come with them

Graduate · enrolled learners

This lesson opens with Longfin, 2017 to 2018.

What happened

Longfin used a lighter-weight registration exemption, a Regulation A+ offering, sometimes called a mini-IPO, to list its shares on Nasdaq in 2017 with far less than the full registration process. Shortly after, it announced acquiring a purported cryptocurrency-related business, and its stock spiked enormously, briefly reaching a multi-billion-dollar valuation. The Securities and Exchange Commission then found that Longfin had not actually satisfied the conditions the exemption required: a large share of its stock had been improperly issued to insiders and affiliates rather than distributed to the public as the offering represented, and the company had made false statements about its revenue and operations. Because the conditions of the exemption were not met, the exemption did not hold, and Longfin was in effect trading on an offering that was not lawfully exempt. The SEC froze about 27 million dollars in allegedly illicit trading proceeds, larger judgments followed, and Nasdaq delisted the company. Longfin had claimed an exemption while failing the conditions that make it available, which is not an exemption at all.

The decision point

An exemption from registration is not a way out of securities law; it is a conditional path through it, available only while its specific conditions are met, on who may invest, how the offering is conducted, what is disclosed, how the securities may be resold. Claiming an exemption is therefore claiming to satisfy its conditions, and if those conditions are not met, the exemption is not available, and what remains is an unregistered securities offering with all the consequences of one. Longfin is the case: it claimed a Regulation A+ exemption but failed its conditions, improperly issuing stock to insiders and making false statements, so the exemption did not hold and it was trading on an offering that was not lawfully exempt, ending in frozen proceeds, judgments and delisting. For a tokenized security, exemptions such as private-placement and small-offering regimes are the practical route to market for many issuers, but each comes with conditions that must be satisfied continuously, not claimed once. So the decision an issuer makes is to treat an exemption as a set of obligations it must actually meet, eligibility, disclosure, resale restrictions, and to keep meeting them, because an exemption whose conditions are breached collapses into an unregistered offering, and the label of the exemption protects nothing once its terms are not honored.

Recorded loss

$27,000,000

Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.

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