After surviving the second assassination attempt, Trump announced the long-rumored cryptocurrency project World Liberty Financial (WLF). Although the details of the project are still not entirely clear, some key information has been exposed through live interviews with Decrypt and Rug Radio. As the latest exploration of the Trump team in the cryptocurrency field, WLF aims to provide decentralized lending services to users using blockchain technology. The core of the project is the governance token WLFI, which operates on the Ethereum blockchain and is managed and operated in a decentralized manner. The project claims that the WLFI token will be more "user-friendly" by simplifying the design and lowering the technical barriers for ordinary users to enter the decentralized finance (DeFi) field.
I. Project Introduction
1. Fundraising Method: Regulation D Rule 506(c)
According to Aiying, WLF project has adopted a special fundraising method, namely raising funds through the U.S. Securities and Exchange Commission (SEC)'s Regulation D Rule 506(c). This fundraising method allows projects to sell tokens to accredited investors through public channels without the need for a complete securities registration process. For large projects like WLF, 506(c) provides a more flexible fundraising path, especially in the current increasingly strict cryptocurrency regulatory environment. Through this rule, the project can legally advertise and target specific investor groups, avoiding the cumbersome and expensive processes of traditional fundraising.
2. WLFI Token Distribution Plan
According to excerpts from the project's white paper, 62.66% of the token supply will be distributed through the upcoming token sale, with a portion of the net proceeds entering the project's multi-signature wallet reserve and another portion being paid to the project's founders, team, and service providers. 17.33% of the tokens will be used to incentivize community governance participation and other community growth plans. The remaining 20% will be allocated to the team, advisors, and future employees, with some tokens being allocated to Trump Group's affiliates, the WLF Foundation, and the Witkoff Group led by Trump's long-time friend Steve Witkoff.
II. Aiying's Interpretation: Regulation D 506(c) Rule
Regulation D Rule 506(c) is an important exemption rule provided by the U.S. Securities and Exchange Commission (SEC), allowing companies to publicly raise funds from accredited investors in a specific manner without full registration. This provision provides a legal fundraising avenue for many startups and cryptocurrency projects, avoiding the complex and expensive processes of traditional securities registration.
1. Public Fundraising Rules of 506(c)
Compared to other fundraising exemption rules (such as Regulation D's 506(b) provision), a significant feature of 506(c) is that it allows projects to conduct public fundraising. This means that project parties can promote their tokens or other securities to potential investors through advertising, social media, and public relations. This is particularly attractive for projects that need to raise large amounts of funds in a short period. Traditional securities laws typically prohibit the public promotion of unregistered securities, but 506(c) removes this restriction, although it has stricter requirements for investor qualifications.
2. Accredited Investor Requirements
Although 506(c) allows public fundraising, the SEC has very strict requirements for investor qualifications. According to the SEC's definition, an accredited investor refers to an individual or entity with relatively mature financial conditions, meeting one of the following conditions:
Individual Investors: Annual income of at least $200,000 in the past two years, or combined annual income with a spouse reaching $300,000, and an expectation to maintain the same level of income in the current year; or individual net assets exceeding $1 million (excluding primary residence).
Institutional Investors: Including financial institutions, trusts, and other legal entities that meet the scale of assets specified by the SEC.
Project parties must ensure that all investors meet the accredited investor standards through strict verification procedures. Common verification methods include auditing tax returns, bank statements, or investors' professional certificates. Although this strict verification process increases the compliance costs for project parties, it effectively ensures market security and reduces fraud risks.
3. Applicability to Cryptocurrency Projects
For cryptocurrency projects, 506(c) provides a legal and compliant fundraising channel, especially in the current regulatory framework where cryptocurrency projects often face complex legal obstacles. With the increasing regulatory efforts of the SEC in the cryptocurrency field, more and more projects are choosing 506(c) as a means of fundraising. For example:
Perpetual Industries: This is an energy technology development company focusing on blockchain and cryptocurrency mining. They conducted a round of Series A preferred stock fundraising through 506(c) to fund their expansion plans for the cryptocurrency mining department. This project allowed them to raise funds from accredited investors through public promotion, which would be used to purchase mining equipment, expand data infrastructure, etc. (MoschettiLaw) (Perpetual News).
Telegram's TON (Telegram Open Network): Although it ultimately faced opposition from the SEC, Telegram initially raised funds through Rule 506(c) and promoted its blockchain project TON to accredited investors. This case demonstrates the potential application of Rule 506(c) in the cryptocurrency field, despite the project being terminated later for not complying with securities regulations.
Although the white paper emphasizes that the WLFI token is not considered a security, it will be sold through SEC's Regulation 506(c) as an unregistered security to qualified investors. This means that it acknowledges that its tokens may be considered securities and sells them to qualified investors in this way, avoiding the risk of violating securities laws. Therefore, all users purchasing WLFI will undergo identity verification standards similar to those of U.S. cryptocurrency exchanges such as Coinbase and Kraken, known as "know your customer" (KYC) standards.
III. How to Ensure Compliance for ICO Projects and Avoid SEC Harassment
For Web3 institutions operating in the U.S. or serving U.S. users, how can they avoid potential scrutiny and prosecution by the SEC? Aiying has summarized the following points for reference:
1. Clearly Define the Token's Use and Function
Priority of Practicality: Ensure that the functionality of your token in the project is clear, such as for paying transaction fees, accessing platform services, participating in community governance, etc. The primary use of the token should be closely related to the actual operation of the platform, rather than primarily serving as an investment tool.
Reduce Speculation: Avoid excessively emphasizing the token's potential for appreciation or investment returns in market promotion, and instead highlight its actual use within the ecosystem. Clearly communicate the token's use cases and practical functions to prevent it from being classified as a "security" by the SEC.
2. Transparent Issuance and Management Processes
Avoid ICO Pitfalls: If conducting token sales, especially ICOs, ensure that the sales process complies with legal requirements. Consider private sales (such as selling only to accredited investors), or conduct registered sales to ensure compliance.
Transparent Management: Clearly disclose the use of project funds, ensure transparency in fund management and usage, and keep it consistent with the initial commitments. Provide regular financial reports and project progress reports to avoid attracting the attention of the SEC due to opaque fund usage.
3. Compliance with Existing Laws and Regulations
Registration or Exemption: When operating in the United States, ensure that your project complies with the SEC's requirements for securities issuance. If the token may be considered a security, consider issuing the token legally through registration or applying for an exemption.
AML and KYC Requirements: Comply with anti-money laundering (AML) and know your customer (KYC) legal requirements. Ensure that platform users undergo strict identity verification during registration and transactions to prevent illegal activities.
4. Collaboration with Legal and Compliance Experts
Hire Legal Counsel: Always work with experienced cryptocurrency legal advisors during the project's development and token issuance. Legal advisors can help assess the project's legal risks and ensure compliance with legal requirements at all stages of the project.
Compliance Team: Establish or hire a dedicated compliance team to monitor regulatory changes globally and make timely adjustments to the project to comply with new regulatory requirements.
5. Clear Marketing and Communication Strategy
Cautious Marketing: Avoid using language that may classify the token as an investment contract in advertising and promotion. For example, avoid promising high returns or emphasizing the speculative value of the token, and focus more on the project's technological innovation, community value, and the token's actual use.
Educate Users: Help users understand the token's functionality and use cases through educational materials to avoid legal issues arising from misunderstandings or incorrect expectations.
6. Prudent Governance and Operating Model
Decentralized Governance: If the project claims to be decentralized, ensure that the governance structure is genuinely decentralized, allowing users to participate in the decision-making process and reducing the central control of the issuer or development team. This helps prevent the SEC from defining the project as a "security" controlled by a few.
Community-Driven: Build strong community support and empower users with more rights through mechanisms such as voting, reducing the project's reliance on core team members, further demonstrating decentralization.
7. Legal Operation of Secondary Markets
Control Market Manipulation Risks: Avoid market price manipulation in the operation of secondary markets, ensuring that all market transactions are fair and transparent. Regularly monitor market behavior to prevent manipulation that may attract the SEC's attention.
Compliant Listing: Before listing the token, ensure that the exchange complies with local legal requirements, especially when listing in the United States, choose an exchange that already complies with SEC regulatory requirements.
8. Addressing Future Legal Challenges
Prepare Contingency Plans: Prepare contingency plans to address legal challenges, including the selection of a legal defense team and communication strategies with regulatory agencies. If faced with regulatory investigations, be able to respond promptly.
Collaborate with Regulatory Agencies: If the regulatory environment changes, actively collaborate with regulatory agencies to demonstrate willingness to adjust the project to comply with new regulations, reducing conflicts and potentially reaching a settlement.
Reference: Decrypt - Donald Trump Launches World Liberty Financial Project Token Details
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