Brokerage firm Prometheum has announced it has a blueprint to bring crypto trading into the regulated marketplace, as the battle over the terms of regulation heats up.
The company, Prometheum Ember Capital, is is claiming on its website that it is the first SEC-registered broker-dealer and Financial Industry Regulatory Authority member firm approved to operate as a Special Purpose Broker-Dealer (SPBD) for digital asset securities.
As first reported by the WSJ, Prometheum’s plan to bring crypto into the mainstream market involves the use of an exemption that US regulators created 50 years ago to permit trading of shares that are restricted, such as those given as compensation to a corporate insider or sold to an early investor.
The exemption is used daily in the stock market to sell millions of shares, but it has never been used in the crypto marketplace.
Prometheum unbound
Seeing as the crypto sector still doesn’t have a federal regulatory supervisor, the six-year-old startup firm with no digital-asset trading revenue and its two chief executives have pinned their hopes with regulators (and some lawmakers) who also hope to move crypto onto regulated exchanges and brokerages.
Prometheum got that special license to hold clients’ crypto assets in May, and SEC Chair Gary Gensler has touted the firm as proof that regulators can find a way to make crypto’s unique market structure work using standard securities laws.
Although crypto has traded for years on digital platforms such as Coinbase in the US, the SEC has maintained that many crypto assets are securities that should be traded by registered brokers or exchanges.
And just because a brokerage like Prometheum might be registered, the sale of its tokens is not a registered activity, which makes the tokens’ resale restricted, just like the shares given as compensation to CEOs.
Rule 144
That is where the SEC’s Rule 144 comes into play.
Under US securities laws, all offers and sales of securities must be registered with the SEC or qualify for some exemption from the registration requirements. Rule 144 allows the public resale of restricted and control securities if a number of conditions are met.
The rule allows the owners of restricted securities to sell after they hold the shares for a year. The ownership period can usually be established pretty easily because companies disclose when they grant shares to insiders. Private companies that sell restricted shares track their limited number of shareholders.
On June 13, Prometheum cofounder and co-CEO Aaron Kaplan appeared at a House of Representatives hearing to discuss providing regulatory clarity to the crypto industry.
Assuming the requirements are met, the next sale can be made to anyone, including smaller investors, which moves the shares into the public market.
The SEC hasn’t endorsed Prometheum’s use of the exemption to trade tokens, and remember, the agency’s current stance is that it believes crypto tokens are the kinds of investments it regulates.
As noted by securities lawyers in the WSJ article, meeting the exemption’s requirements, including proving that the seller held the asset for at least a year, can be difficult to establish in crypto where trading was meant to be anonymous.
Financial disclosures
Trading involves assets that were previously owned, and the original token sales were not registered — plus token issuers don’t provide the kind of financial disclosures that public companies do.
There is no register of the holders of tokens, and Gensler has insisted that investors buying tokens should get information about the startup that sold the coin and is trying to boost its value – akin to what shareholders in public companies receive so they can ascertain risk.
Furthermore, Prometheum isn’t actually trading any tokens yet, because it needs another regulatory permit to conduct post-trade settlement and processing.
Congressional testimony
On June 13, Prometheum cofounder and co-CEO Aaron Kaplan appeared before the US House of Representatives at a hearing to discuss providing regulatory clarity to the crypto industry.
He offered a glowing review of the regulator, calling it “the most capable financial markets regulatory agency in the world.” And he told lawmakers that he backed Gensler’s view that most crypto assets are securities and argued against writing a new law to regulate crypto, which four Republican House members have released as a discussion draft.
Some lawmakers pushed back immediately. “To testify in front of our committee that your company’s charter, which only allows for trading in a very small subset of assets, is evidence that no legislation is needed just doesn’t make sense,” said Rep. Mike Flood (R-NE).
Other lawmakers questioned how Prometheum secured the first special custody license when it is almost 20% owned by a Chinese crypto company.
As documents attached to Kaplan’s testimony state, HashKey is a passive investor and Prometheum no longer has any technology or commercial partnerships with it. HashKey has had a member on Prometheum’s board, but that member, Xiao Feng, is resigning, according to a spokesperson contacted by the WSJ.
Prometheum said the SEC investigated its Chinese ties in 2021 and closed the probe without taking any formal action.