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 December 2017 with far less than the full registration process. Shortly after, it announced acquiring a purported cryptocurrency business, its stock price rose dramatically, and its market capitalization exceeded 3 billion dollars. The Securities and Exchange Commission alleged that Longfin had not actually satisfied the conditions the exemption required: it had obtained qualification for the offering by falsely representing that the company was principally managed and operated in the United States, when Regulation A is open only to issuers whose principal place of business is in the United States or Canada; it had distributed over 400,000 free shares to insiders and affiliates and misrepresented the number of qualifying shareholders and shares sold in the offering to meet Nasdaq's listing requirements; restricted shares issued to affiliates had been sold to the public without registration; and the company had recorded more than 66 million dollars of fictitious revenue from sham commodities transactions. 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. In April 2018 the SEC obtained an order freezing more than 27 million dollars in trading proceeds; in May 2018 Longfin delisted from Nasdaq after Nasdaq said it intended to issue a delisting determination; in 2019 a court entered a default judgment of about 6.8 million dollars against the company; and by January 2020 the SEC had secured over 26 million dollars of ill-gotten gains across the case. 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, the SEC alleged, failed its conditions, misrepresenting where it was managed to qualify, issuing free stock to insiders and misstating its offering to Nasdaq, so the exemption did not hold and it was trading on an offering that was not lawfully exempt, ending in frozen proceeds, a judgment 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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