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Addressing securities regulations
MetaCartel Ventures aims to participate in a wide range of investment opportunities ranging from cryptonative tokens which may not be securities to SAFEs, SAFTs, revenue-sharing arrangements and other types of debt or equity securities. Because many projects rely on the exemptions from securities registration provided by Rule 506(c)(3) under Regulation D, which requires that all the participating investors be “accredited investors,” MCV requires to be recognised as an “accredited investor” under the applicable standards for the accreditation of legal entities under Regulation D. This will be the case if MCV either only has members who are “accredited investors” under the net worth or income tests of Rule 501 of Regulation D or if MCV itself has assets in excess of $5M.
This means that MetaCartel Venture’s initial membership will be limited to individuals satisfying the financial tests for being an “accredited investor.” Such individuals must either have individual net worth, or joint net worth with a spouse, exceeding $1,000,000 or must have income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 in each of those years and have a reasonable expectation of reaching the same income level in the current year. Only once MCV manages more than $5,000,000 USD in assets, could individuals that are deemed to be “unaccredited investors” potentially become members of MCV (as Mages), without adversely affecting MCV’s ability to invest in other projects.
As MCV issues out membership interests to its members, it must ensure that its transactions are either registered or exempt from registration (eg. pursuant to Rule 506(c)) under applicable securities laws.
Because of the extensive management and information rights of MCV’s members, along with MCV’s small scale, MCV may be and in fact is intended to be--a general partnership for securities law purposes. Accordingly, it is possible that its membership interests are not securities for purposes of U.S. federal securities laws. “The general rule [eg. presumption -ed. .] is that units in general partnerships are not investment contracts and therefore not securities...” (Shiner, 268 F.Supp.2d at 1340). Moreover, it is arguable whether MCV’s membership interests implicate the policy concerns underlying securities laws as strongly as a conventional securities transaction, given the non-transferability of membership interests, the radical right of “free exit” afforded to MCV members and the lack of information asymmetries among members. Nevertheless, because MCV wishes to encourage the extensive use of such rights and to set a particularly strong example of quality governance and legal compliance, MCV goes further by assuming that its membership interests could be securities and requiring all membership interest transactions to comply with U.S. federal securities laws.
While MCV may choose to avail itself of any securities law compliance path, it is currently anticipated to operate as follows:
- persons who are “accredited investors” under the net asset or income tests of Rule 501(a) of Regulation D may become either Mages or Goblins, as desired, pursuant to Rule 506(c);
- persons who have the competence and willingness to serve as Mages and thus function as general partners of MCV may become Mages and may remain Mages for as long as they fulfill their Mage responsibilities, and either their membership interests will not be securities or, if they are, the transaction will be exempt because the Mages qualify as general partners and thus accredited investors under Rule 501(a)(4) of Regulation D or because the transaction is exempt under Rule 701.
The LLC will be taxed as a U.S. partnership, meaning that the LLC pays no taxes but its members do. As a result, each member's pro rata share of the profits and losses of the LLC will be reportable as the member's individual income or loss each year. The Mages will be responsible for ensuring that each year the LLC engages tax accountants to prepare a Schedule K-1 for each member setting forth the member's share of the LLC's profits and losses for that year. The Mages will also be responsible for causing each Schedule K-1 to be filed with the IRS each year. Every member will need to submit a Form W-9 or Form W-8BEN, as applicable, as part of the member’s onboarding, to certify that the member is exempt from backup withholding on distributions of funds from the DAO.