Brokerage Firm Prometheum Wants to Use Exemption to Trade Crypto
Rule 144, frequently used to trade restricted stock, has never been used in the digital asset market
WASHINGTON—A small brokerage firm thinks it has a blueprint to bring crypto trading into the regulated market.
Prometheum’s plan involves the use of an exemption that regulators created 50 years ago to permit trading of shares that were restricted, such as those given as compensation to a corporate insider or sold to an early investor. The exemption is used daily in the stock market to sell millions of shares.
It has never been used in crypto, however, which developed as an unregulated alternative to Wall Street that still doesn’t have a federal market overseer. Prometheum, a six-year-old startup with no digital-asset trading revenue, has cast its lot with regulators hoping to move crypto onto regulated exchanges and brokerages.
“It’s an element of what you would call the intellectual capital that led us to build out a unique business, and essentially other people haven’t necessarily focused on that,” Prometheum co-Chief Executive Aaron Kaplan said in an interview.
Prometheum already scored one first—last month it became the first brokerage firm to secure a special license to hold clients’ crypto assets. Securities and Exchange Commission Chair Gary Gensler has touted Prometheum as proof that regulators can find a way to make crypto’s unique market structure work with old-fashioned securities laws.
Crypto has traded for years in the U.S. on digital platforms such as Coinbase, but the SEC says many crypto assets are securities that must be traded by registered brokers or exchanges. The SEC sued Coinbase earlier this month, alleging the company violated rules that required it to register as an exchange or broker.
Finding a registered broker who wants to trade crypto assets still doesn’t make the tokens themselves free to be traded. That is because their sale was never registered, making their resale restricted just like the shares given as compensation to CEOs or public-company directors.
Prometheum says the exemption, known as Rule 144, is one way to solve that.
Rule 144 allows the owners of restricted securities to sell after they hold the shares for a year. The ownership period can usually be easily established because companies disclose when they grant shares to insiders. Private companies that sell restricted shares track their limited number of shareholders. Assuming the requirements are met, the next sale can be made to anyone, including smaller investors, which moves the shares into the public market.
The SEC hasn’t endorsed Prometheum’s use of the exemption to trade tokens that the agency believes are the kinds of investments it regulates.
Some securities lawyers question whether Rule 144 can be used to trade cryptocurrencies that have been trading on crypto exchanges that don’t follow SEC rules. Meeting the exemption’s requirements, including proving that the seller held the asset for at least a year, can be difficult to establish in crypto where trading was meant to be anonymous, said David Adams, an attorney at Goodwin Procter LLP.
“Any broker-dealer that embarks down this path is going to be under incredible scrutiny,” Adams said. “Just because you are approved…that does not mean that goodwill will necessarily continue if you start to list some crypto assets or tokens that the SEC” doesn’t agree with, he said.
Concern about how to trade crypto tokens in compliance with SEC rules has slowed down other brokers that want to connect buyers and sellers of digital assets, said Annemarie Tierney, a securities lawyer who previously worked for Nasdaq and the New York Stock Exchange and now consults for crypto companies. “There is no register of holders of tokens in the wild,” Tierney said. “It could have been anywhere. You don’t know where it has been and who owns it.”
Prometheum has said that crypto assets including Filecoin, Flow, The Graph, Compound, and Celo can be traded on its venue. The original token sales weren’t registered and the issuers don’t provide the kind of financial disclosures that public companies do.
Gensler has insisted that investors buying tokens should get information about the startup that sold the coin and is trying to boost its value—akin to what shareholders in public companies receive. “It’s about disclosure, that the public can kind of look at the project and see what the risks are,” Gensler said in a recent interview.
The token issuer may have an obligation to provide disclosures, but Prometheum doesn’t, said Benjamin Kaplan, who is co-CEO with his brother Aaron.
“We have vetted this internally and with our counsel and it is understood that we are not the gatekeepers for disclosure purposes,” Benjamin Kaplan said. “We disclose to customers that there is a lot of unknowns and certain companies may not be in compliance with the federal securities laws.”
Robinhood Markets, a better known brokerage firm, also applied for the special custody approval that Prometheum secured, but didn’t receive it. Robinhood’s chief legal officer, Dan Gallagher, told House lawmakers in June that SEC officials said one problem was “the issuer disclosure deficiency that the SEC views as being present in crypto markets.”
Prometheum isn’t trading any tokens yet. It needs another regulatory permit to conduct post-trade settlement and processing, Kaplan said. The company plans to announce other tokens it will trade “as we get closer to going live,” Kaplan said.
Prometheum faced tough questions from congressional Republicans last week when Aaron Kaplan testified at a hearing of the House Financial Services Committee. He told lawmakers that he backed Gensler’s view that most crypto assets are securities and argued against writing a new law to regulate crypto, which House Republicans are drafting.
“To testify in front of our committee that your company’s charter, which only allows for trading in a very small subset of assets, is evidence that no legislation is needed just doesn’t make sense,” said Rep. Mike Flood (R., Neb.).
Other lawmakers questioned how Prometheum secured the first special custody license when it is almost 20% owned by a Chinese crypto company. Kaplan said that the Chinese company, HashKey, is a passive investor and that Prometheum no longer has any technology or commercial partnerships with it. HashKey had a member on Prometheum’s board, but that member, Xiao Feng, is resigning, according to a company spokesman.
Prometheum said the SEC investigated its Chinese ties in 2021 and closed the probe without taking any formal action.