After a second assassination attempt, Trump released the long-rumored cryptocurrency project World Liberty Financial (WLF). Although the details of the project are still not completely clear, some key information was revealed through live interviews with Decrypt and RugRadio. As the latest exploration of the Trump team in the field of cryptocurrency, WLF aims to use blockchain technology to provide users with decentralized lending services. The core of the project is the governance token WLFI, which runs 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" and reduce the technical barriers for ordinary users to enter the field of decentralized finance (DeFi) through a simplified design.
1. Project Introduction
1. Fundraising method: Regulation D Rule 506(c)
According to Aiying, the WLF project adopted a special financing method, namely, fundraising through Regulation D Rule 506(c) of the U.S. Securities and Exchange Commission (SEC). This fundraising method allows projects to sell tokens to qualified investors through public channels without the need for a complete securities registration procedure. For large projects like WLF, 506(c) provides a more flexible fundraising path, especially in the current situation of increasingly stringent cryptocurrency regulation. Through this rule, projects can legally publicize and target specific investor groups, avoiding the cumbersome and expensive process of traditional financing.
2. WLFI Token Distribution Plan
According to an excerpt from the project's white paper, 62.66% of the token supply will be distributed through the upcoming token sale, with part of the net proceeds from the sale going into the project's multi-signature wallet reserve and the other part being paid to the project's founders, team, and service providers. Another 17.33% of the tokens will be used to incentivize community governance participation and other community growth initiatives. The remaining 20% will be allocated to the team, consultants, and future employees, with some of the tokens going to Trump Group affiliates, the WLF Foundation, and the Witkoff Group, led by Trump's longtime friend Steve Witkoff.
II. Aiying’s Interpretation: Regulation D 506(c)
Regulation D Rule 506(c) is an important exemption rule provided by the U.S. Securities and Exchange Commission (SEC) that allows companies to raise funds from qualified investors through specific methods without comprehensive registration. This provision provides many startups and cryptocurrency projects with a legal way to raise funds, avoiding the complex and expensive process of traditional securities registration.
1. 506(c) Public Offering Rules
Compared with other fundraising exemption rules (such as Regulation D's 506(b)), one of the distinguishing features of 506(c) is that it allows projects to conduct public fundraising. This means that project parties can promote their tokens or other securities products to potential investors through advertising, social media, publicity, etc. This is particularly attractive for projects that need to raise large amounts of capital in a short period of time. Traditional securities laws usually require that unregistered securities products must not be publicly promoted, while 506(c) removes this restriction, but it has stricter requirements for investor qualification review.
2. Qualified Investor Requirements
Although 506(c) allows public fundraising, the SEC has very strict requirements for investor qualifications. According to the SEC’s definition, accredited investors are individuals or entities with relatively mature financial conditions who meet one of the following conditions:
Individual investors: Have an annual income of at least $200,000 in the past two years, or have a combined annual income of $300,000 with a spouse and expect to maintain the same income level in the current year; or have a personal net worth of more than $1 million (excluding primary residence).
Institutional investors: include financial institutions, trusts and other legal entities with asset sizes that meet SEC regulations.
Project owners must go through a rigorous verification process to ensure that all investors meet the criteria for qualified investors. Common verification methods include reviewing tax returns, bank statements, or investors’ professional certificates. Although this rigorous verification process increases the compliance costs of project owners, it effectively ensures market security and reduces the risk of fraud.
3. Applicability to cryptocurrency projects
For cryptocurrency projects, 506(c) provides a legal and compliant fundraising channel, especially in the existing regulatory framework, where crypto projects often face complex legal obstacles. As the SEC increases its supervision of the cryptocurrency field, more and more projects are beginning to choose 506(c) as a fundraising method. For example:
Perpetual Industries: This is an energy technology development company focused on areas such as blockchain and cryptocurrency mining. They raised a Series A preferred stock round through 506(c) to raise funds for expansion plans for their cryptocurrency mining division. This program allows them to raise funds from qualified investors through public advertising, and these funds will be used to purchase mining equipment, expand data infrastructure, etc. (MoschettiLaw) (Perpetual News).
Telegram's TON (Telegram Open Network): Although it ultimately faced SEC resistance, Telegram also initially raised funds through Rule 506(c) to promote its blockchain project TON to qualified investors. This case demonstrated the potential of Rule 506(c) in the crypto space, although the project was later terminated due to non-compliance with securities laws.
Although the white paper emphasizes that WLFI tokens are not considered securities, their tokens will be sold through the SEC's Regulation D 506(c), that is, sold to qualified investors as unregistered securities. This means that it acknowledges that its tokens may be considered securities, and by selling them to qualified investors in this way, it avoids the risk of violating securities laws. Therefore, all users who purchase WLFI will be subject to identity verification similar to the "Know Your Customer" (KYC) standards of US cryptocurrency exchanges such as Coinbase and Kraken.
3. How to comply with ICO regulations and avoid SEC harassment
How can Web3 organizations in the United States or serving American users avoid possible criticism and prosecution by the SEC? Aiying Aiying summarized the following points for your reference:
1. Clearly define the purpose and function of the token
Prioritize practicality: Make sure the functionality of your token in the project is clear, such as being used to pay transaction fees, access platform services, participate in community governance, etc. The main purpose of the token should be closely related to the actual operation of the platform, rather than being primarily an investment tool.
Reduce speculation: Avoid over-emphasizing the appreciation potential or investment returns of tokens in marketing, and highlight their actual use in the ecosystem. Clearly tell users the use scenarios and actual functions of tokens to prevent the SEC from identifying them as "securities."
2. Transparent issuance and management process
Avoid ICO pitfalls: If you are conducting a token sale, especially an ICO, make sure the sale process complies with legal requirements. Consider a private sale (i.e., selling only to accredited investors) or a registered sale to ensure compliance.
Transparent management: Clearly disclose how project funds are used to ensure that the management and use of funds are transparent and consistent with the initial commitment. Provide regular financial reports and project progress reports to avoid attracting the attention of the SEC due to opaque use of funds.
3. Comply with current laws and regulations
Registration or exemption from registration: When operating in the U.S., make sure your project complies with the SEC’s requirements for securities issuance. If the token may be considered a security, consider registering or applying for an exemption to legally issue the token.
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 the registration and trading process to prevent illegal activities.
4. Collaborate with legal and compliance experts
Hire legal counsel: Always work with experienced cryptocurrency legal counsel during the process of project development and token issuance. Legal counsel can help you assess the legal risks of your project and ensure that legal regulations are followed at all stages of the project.
Compliance team: Establish or hire a dedicated compliance team to monitor regulatory changes around the world and adjust projects in a timely manner to comply with new regulatory requirements.
5. Clear marketing and communication strategy
Careful marketing: Avoid using language that could make the token be seen as an investment contract in publicity and promotion. For example, avoid promising high returns or emphasizing the speculative value of tokens, and focus more on the project's technological innovation, community value, and the actual use of tokens.
Educate users: By publishing educational materials, help users understand the functions and use cases of tokens and avoid legal issues caused by misunderstandings or wrong expectations.
6. Prudent governance and operating model
Decentralized governance: If a project claims to be decentralized, ensure that the governance structure is truly decentralized, users can participate in the decision-making process, and reduce the centralized control of the issuer or development team. This helps prevent the SEC from defining the project as a "security" controlled by a few people.
Community-driven: Build strong community support and empower users through voting and other mechanisms, reduce the project's dependence on core team members, and further reflect decentralization.
7. Legal secondary market operations
Control market manipulation risks: In secondary market operations, avoid manipulating market prices and ensure that all market transactions are fair and transparent. Regularly monitor market behavior to prevent manipulation that may attract the attention of the SEC.
Compliance listing: Before listing a 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. Prepare for future legal challenges
Prepare contingency plans: Prepare contingency plans for legal challenges in advance, including the selection of legal defense teams, communication strategies with regulators, etc. If you encounter a regulatory investigation, you can respond quickly.
Work with regulators: If the regulatory environment changes, proactively working with regulators to demonstrate your willingness to adjust your project to comply with new regulations can reduce conflict and potentially lead to a settlement.
