Prometheum, which is working to establish a Securities and Exchange Commission-approved security token and blockchain infrastructure, raised $12 million this week in funding that the company hopes can hasten the launch of its network in early 2019.
Aaron Kaplan, Prometheum’s co-CEO, said it expects the SEC to approve a Regulation A offering statement for its smart security tokens, called Ember. The approval would allow any investor to buy and sell the tokens and be legally tradable in the secondary securities market in the United States.
“We’ve embraced regulation since inception,” said Kaplan. “We were the first company to publicly file Reg A in the U.S. and we anticipate being the first ones approved.”
The SEC declined to comment on Prometheum’s approval status. Prometheum first filed the Reg A offering statement in November 2017.
The startup’s efforts at establishing a regulator-approved offering mirrors those at financial firms such as Circle Internet Financial and Fidelity Investments, which are working to give more legitimacy to crypto assets as an investment vehicle.
HashKey Digital Asset Group Limited, a holding company that invests in the fintech and blockchain industries, provided a combination of cash and services to Prometheum as part of the funding round. New York-based Prometheum also announced a strategic partnership with China’s Wanxiang Blockchain Labs, an early backer of Ethereum.
Ethan Silver, chair of the broker-dealer practice at Lowenstein Sandler, said Prometheum is not alone in its quest to obtain Reg A approval for security tokens. He’s seen other filings, but none have been approved.
The challenge for such companies is that the SEC has to be comfortable with the protection afforded by the technology, Silver said.
“A lot of it points back to the custody issue” of the asset, said Silver. “It’s a little bit more clear when you have a certificate for a security. In this context, you’re talking about some alphanumeric key and I think the SEC wants to be comfortable when you say you are custodian of the security. How does the SEC know you have physical custody of this security, or possession, and someone hasn’t duped you?”
Prometheum’s approach to regulatory approval is part of the reason it does not expect to go live until Q1 2019, Kaplan said.
“The SEC has been very meticulous in going through that process of approving any sort of tokens because historically what you’ve seen in the blockchain space, whether it’s ICOs or tokens, are people trying to skirt regulation and there’s been a lot of scams,” he said.
Indeed, the SEC this year has made it a habit to crack down on initial coin offering scams, settling charges with former executives that total millions of dollars.
Last month, the SEC settled ICO scam charges with two former executives from AriseBank. Former CEO Jared Rice Sr. and former COO Stanley Ford are expected to pay a combined $2.7 million in disgorgement and penalties.
AriseBank was not registered with any banking or securities regulators.
The SEC said AriseBank misrepresented itself to investors as a “first-of-its-kind decentralized bank offering its own cryptocurrency to be used for a broad range of customer products and services.”
AriseBank’s marketing efforts gained the attention of the sports world because its advertising featured retired champion boxer Evander Holyfield.
Kaplan said bad actors have not derailed its efforts with the SEC. He claims they’ve only enhanced them.
“The fact that other people have been so flippant in disregarding the regulation actually makes our job a little easier because we’ve taken the complete opposite approach,” he said.
“The SEC is not trying to stifle innovation,” Kaplan added. “They’re just trying to make sure that people act properly under the federal securities laws of the United States and that’s exactly what we’re doing.”
Prometheum, which was founded by Wall Street securities attorneys, will work with Wanxiang to “establish our protocol and implement our tech,” said Kaplan.
He added that Prometheum’s platform will leverage blockchain technology to allow for executed trades to be written into the blockchain, and for settlement to occur over the blockchain. “The blockchain is an excellent means and immutable record of transfer of value,” said Kaplan. “In our case, this transfer of value is a security.”