Erin Schneider on SPACs, Coinbase & Startup Improvement

SEC Guidance for Crypto Startups: Insights from Erin Schneider

Startups seeking clarity on crypto lending regulations, rules for special purpose acquisition companies (SPACs), or the SEC’s stance on non-fungible tokens (NFTs) received limited direct answers this week from Erin Schneider, the regional director of the SEC’s San Francisco office.

Limited Disclosure and Personal Insights

During her appearance at TechCrunch Disrupt 2021, Schneider acknowledged constraints on what she could publicly disclose. However, she offered valuable perspectives on several key issues, stemming from her team’s work with high-profile cases involving Theranos, Elon Musk, and App Annie.

Navigating Federal and State Regulations

Regarding Coinbase’s abandoned crypto lending product and BlockFi’s challenges with state regulators, Schneider emphasized the necessity for startups to comply with both federal and state regulations. These regulations can vary significantly depending on the specific state.

She further highlighted the potential for consumer confusion regarding financial products like Coinbase’s proposed offering, stating that such products could easily mislead investors.

The Regulatory Future of NFTs

The discussion also touched upon the potential regulation of NFTs as securities. Referencing events at OpenSea, where a director of product admitted to purchasing NFTs prior to their promotion, Schneider indicated the SEC is closely monitoring this evolving landscape.

Schneider explained that the Howey test will be central to determining whether an NFT qualifies as a security. She stated, “From my perspective, and not speaking for the Commission, I’ve observed some NFTs that don’t immediately raise concerns.”

However, she added, “If assets are pooled, reliance is placed on others’ efforts, and investors anticipate profits, closer scrutiny is warranted. This doesn’t guarantee a security designation, but each case will be evaluated individually. This is an area of growing interest, and we will continue to observe it.”

Prioritizing Compliance for Long-Term Success

Schneider advised startups to prioritize compliance alongside growth. Many new companies dedicate resources to expansion and market share, often neglecting legal counsel and compliance personnel.

She cautioned, “While I understand this is a strategic choice, it can ultimately be detrimental. Investing in qualified compliance professionals and legal experts from the outset allows for thorough product analysis and informed decision-making.”

Early investment in robust compliance structures can significantly reduce the risk of SEC investigations.

Additional Considerations for Fintech Startups

Schneider also suggested that fintech startups operating without bank charters should reconsider using the term “bank” in their branding. Furthermore, she indicated that the marketing and structure of SPACs may require further examination.

For a comprehensive understanding of Schneider’s insights, including her views on SPACs and the appropriate terminology for fintech companies, the full interview is available for review.