FAQs: Reg S Compliance vs US Jurisdiction-minimization

Last week Jake Chervinsky and Daniel Barabander published an excellent piece titled “A Practical Guide to Geofencing” discussing one strategy to minimize US regulatory interference for crypto projects. If you have not yet read it, I encourage you do so (link here: A Practical Guide to Geofencing).

Specifically, the article (and Morrison, the seminal US Supreme Court case on which the article focuses) addresses limits on the extraterritorial application of the ‘33 Act. Since this article dropped, I have received a number of questions asking how Reg S fits in with Morrison and the strategy of US jurisdiction-minimization (“jx-minimization”), generally.

What is the difference between geofencing for purposes of jx-minimization and geofencing for Reg S compliance?

Jx-minimization efforts seek to avoid the application of all US law to a crypto offering. Reg S, on the other hand, acknowledges that the offering is (or may be) subject to US law, but that it is nonetheless exempt from registration under the ‘33 Act.

When are the two strategies mutually inclusive?

Generally speaking, offshore offerings by actors that qualify as foreign private issuers under Rule 405 of Regulation C of the ‘33 Act and Rule 3b-4 of the ‘34 Act should incorporate both Reg S, Cat 1 and jx-minimization strategies/defenses. The compliance checks for FPIs under both are generally aligned.

When should jx-minimization NOT be relied upon as the primary shield against SEC reach?

As the article points out, jx-minimization requires that the offering not involve “domestic activity.” In the crypto context, this (perhaps, over-simply) boils down to:

• the location of parties in the token offering; and
• the location of the on and offchain infrastructure.

Given this, even where air-tight US geofencing is implemented, Reg S should generally backstop the offering where:

• The issuer is domestic (or is an offshore entity “effectively” controlled by US residents);
• The issuer intends to support DEX liquidity since DEXs may qualify a domestic infrastructure (or more directly, the SEC would argue that most qualify as US exchanges-potentially even those that geofence US users- see prior Reg S articles); or
• The crypto asset is backed by US treasuries or pegged to the US dollar. This means that even FPI issuers of tokenized T-bills, yield-bearing stablecoins backed by US treasuries, or even US-pegged non-yield stables (non-fiat backed) are advised to avail themselves of Reg S given the potential for the US T-bill/dollar nexus satisfying the US infrastructure/”domestic activity” requirement set forth in Morrison.