This disconnect could have been easily revealed ex ante if the SEC had employed basic game theory and predictive analysis. It is likely that the SEC’s active enforcement of pre-crypto securities law has created a status quo that is antithetical to the Commission’s core mission of protecting investors, particularly the less sophisticated ones. My empirical analysis of two hand-collected datasets covering SEC enforcement and crypto-issuer filings in 2017-2021 supports this conclusion. Many cryptoasset issuers (also “crypto-issuers”) rely on private placement exemptions that pose additional risks in crypto. This outcome is harmful to various purchasers of cryptoassets regardless of their intent: some intend to use the purchased assets and related services, while others acquire cryptoassets in search of profitable investment opportunities. Namely, recent crypto-enforcement under the mantra of protecting investors and providing them with material information about digital-asset securities has resulted in a market environment with less information. Representing the fourth piece in my tetralogy of papers examining the regulation of cryptoassets, this Article contributes to the rich scholarship on financial innovation, enforcement, and digital-asset revolution 5 and underscores the detrimental effect of the disconnect between the ends and the means on both investors and innovators. This Article examines a crucial example of this harmful “schism” in the digital-asset (also “cryptoasset”) markets.
3 Unfortunately, a fundamental disconnect may materialize between the SEC’s statutory objectives and the ways various divisions, particularly the Division of Enforcement, implement its overarching goals. 2 Created in the wake of the Great Depression, the SEC pursues a ternary set of regulatory objectives of protecting investors, maintaining fair and efficient markets, and facilitating capital formation. The focus of our analysis will be the Securities and Exchange Commission (“SEC” or “Commission”), a leading capital-market watchdog performing a plethora of functions ranging from the oversight of securities exchanges, corporate reporting, and investment companies to enforcement and many others. This dilemma between the ends and the means may materialize when large bureaucratic institutions with sprawling divisions in charge of various aspects of their respective statutory missions enforce the law without ensuring that enforcement actually comports with the missions. In this Article, I address a situation where the means undermine the regulatory ends. The famous quote from Machiavelli’s The Prince states that “in the actions of all men, and especially of princes, one judges by the result.” 1 In short, the end justifies the means. As no one wins in this scenario, a reform revising crypto-issuer disclosure is needed. This status quo is also harmful to crypto-issuers, who face higher capital costs. To conclude, in actively enforcing pre-digital-asset law, the SEC has funneled crypto-issuers into inadequate and lackadaisical compliance with exemptions and created a status quo that is antithetical to the SEC’s core mission of protecting investors. In contrast, the more sophisticated crypto-investors rely on what the Article calls “the pure-information model” that exists independently of the SEC-enforced regulations. This compliance option reduces market transparency and is harmful to the less sophisticated crypto-investors. Using two hand-collected datasets, the Article shows that following an increase in enforcement, cryptoasset issuers have attempted to comply with securities law by resorting to private placements. This disconnect between the SEC’s means and ends is relevant not only to cryptoasset investors but also to other purchasers such as consumers and users. This Article examines a fundamental disconnect between the objectives of the SEC and the actual outcome of its policies in digital-asset markets-the agency’s enforcement efforts under the mantra of protecting investors and providing digital-asset markets with more information have produced an environment with less information. Created in the wake of the Great Depression, the SEC pursues a ternary set of objectives, including protecting investors, maintaining efficient markets, and facilitating capital formation.
The focus of this Article is the Securities and Exchange Commission (“SEC”), the major capital-market watchdog. This Article addresses a situation where the means undermine the regulatory ends. Paraphrasing Machiavelli, the end justifies the means. Machiavelli famously said that actions of all men, particularly of regulators, should be judged by the results.
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