After surviving a second assassination attempt, Trump launched the long-rumored cryptocurrency project, World Liberty Financial (WLF). While details of the project remain somewhat unclear, key information was revealed through live interviews with Decrypt and RugRadio. As the latest exploration by Trump’s team in the cryptocurrency space, WLF aims to leverage blockchain technology to provide decentralized lending services to users. At 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,” simplifying its design to lower the technical barriers for everyday users entering the decentralized finance (DeFi) space.

1. Project introduction

1. Fundraising Method: Regulation D Rule 506(c)

According to Aiying, the WLF project uses a special fundraising method by utilizing the U.S. Securities and Exchange Commission’s (SEC) Regulation D Rule 506(c). This fundraising method allows the project to sell tokens to accredited investors through public channels without the need for a full securities registration process. For large projects like WLF, Rule 506(c) provides a more flexible fundraising pathway. Especially in the current climate of tightening cryptocurrency regulations, this rule enables the project to legally advertise publicly and target a specific group of investors, avoiding the cumbersome and expensive processes of traditional fundraising.

1. WLFI Token Allocation Plan

According to excerpts from the project’s whitepaper, 62.66% of the token supply will be distributed through the upcoming token sale. A portion of the net proceeds from the sale will go into the project’s multi-signature wallet reserve, while another portion will be paid to the project founders, team members, and service providers. An additional 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, advisors, and future employees, with some tokens allocated to Trump Organization affiliates, the WLF Foundation, and Steve Witkoff’s Witkoff Group, a longtime friend of Trump.

2. Aiying 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), allowing companies to raise funds from accredited investors publicly without going through comprehensive registration. This clause offers a legal fundraising avenue for many startups and cryptocurrency projects, avoiding the complex and costly processes of traditional securities registration.

1. 506(c) public fundraising rules

Compared to other fundraising exemption rules (such as Regulation D’s 506(b) clause), a significant feature of 506(c) is that it allows for public fundraising. This means that project teams can promote their tokens or other securities products to potential investors through advertising, social media, and public announcements. This is particularly attractive for projects needing to raise substantial amounts of funds quickly. Traditional securities law typically prohibits non-registered securities from being publicly advertised, but 506(c) lifts this restriction, although it imposes stricter requirements for verifying investor qualifications.

1. Accredited investor requirements

Although 506(c) permits public fundraising, the SEC has very strict requirements regarding investor qualifications. According to the SEC’s definition, an accredited investor is a financially sophisticated individual or entity that meets at least one of the following conditions:

Individual investors: Have an annual income of at least $200,000 in the past two years or a joint income with a spouse of $300,000, with the expectation of maintaining the same income level in the current year; or have a net worth exceeding $1 million (excluding primary residence).

Institutional investors: Include financial institutions, trusts, and other legal entities with asset sizes meeting SEC requirements.

Project teams must go through a stringent verification process to ensure that all investors meet accredited investor standards. Common verification methods include reviewing tax returns, bank statements, or investors’ professional certifications. Although this strict verification process increases the compliance costs for project teams, it effectively safeguards market security and reduces the risk of fraud.

1. 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 hurdles. As the SEC increases its regulatory oversight in the cryptocurrency field, more and more projects are opting for 506(c) as a fundraising method. For example:

Perpetual Industries: This is an energy technology development company focused on blockchain and cryptocurrency mining. They conducted a Series A preferred stock fundraising round through 506(c) to raise funds for expanding their cryptocurrency mining division. This project allows them to raise funds from accredited investors through public announcements, with the proceeds being used to purchase mining equipment and expand data infrastructure.

Telegram’s TON (Telegram Open Network): Although ultimately facing SEC obstacles, Telegram initially raised funds through Rule 506(c) to promote its blockchain project TON to accredited investors. This case demonstrates the application potential of Rule 506(c) in the crypto field, even though the project was later terminated for not complying with securities law.

Although the white paper emphasizes that WLFI tokens are not considered securities, they will be sold under the SEC’s D Regulation 506(c) clause, meaning they are sold as unregistered securities to accredited investors. This implies that it acknowledges the possibility of its tokens being classified as securities and avoids the risk of violating securities law by selling to accredited investors in this manner. Therefore, all users purchasing WLFI will undergo identity verification similar to the “know your customer” (KYC) standards at U.S. cryptocurrency exchanges like Coinbase and Kraken.

3. How to ensure compliance for ICO projects and avoid SEC harassment?

For Web3 organizations operating in the U.S. or serving U.S. users, how can they avoid potential scrutiny and lawsuits from the SEC? Aiying summarizes the following points for reference:

1. Clearly define the utility and function of the token.

Prioritize utility: Ensure that the token’s functionality in the project is clear, such as being used for transaction fees, accessing platform services, or participating in community governance. The main purpose of the token should closely relate to the actual operation of the platform rather than primarily serving as an investment tool.

Reduce speculation: Avoid overemphasizing the token’s appreciation potential or investment returns in marketing; instead, highlight its actual uses within the ecosystem. Clearly inform users of the token’s use cases and functions to prevent the SEC from classifying it as a “security.”

1. Transparent issuance and management processes.

Avoid ICO pitfalls: If conducting a token sale, especially an ICO, ensure that the sales process complies with legal requirements. Consider private sales (e.g., selling only to accredited investors) or registered sales to ensure compliance.

Transparent management: Clearly disclose how project funds will be used to ensure that fund management is transparent and aligns with initial commitments. Provide regular financial and project progress reports to avoid attracting SEC attention due to opaque fund usage.

1. Compliance with existing laws and regulations.

Registration or exemption from registration: When operating in the U.S., ensure your project meets SEC requirements for securities issuance. If the token may be deemed a security, consider registering or applying for an exemption to issue tokens legally.

AML and KYC requirements: Comply with anti-money laundering (AML) and know your customer (KYC) legal requirements. Ensure that platform users undergo rigorous identity verification during registration and trading to prevent illegal activities.

1. Collaborate with legal and compliance experts.

Hire legal advisors: Throughout project development and token issuance, work closely with experienced cryptocurrency legal advisors. They can help assess legal risks and ensure compliance at every stage of the project.

Compliance team: Establish or hire a dedicated compliance team to monitor global regulatory changes and adjust the project promptly to meet new requirements.

1. Clear marketing and communication strategies.

Cautious marketing: In promotion, avoid using language that might lead to the token being considered an investment contract. For instance, avoid promising high returns or emphasizing speculative value, focusing more on the project’s technological innovations, community value, and the token’s actual uses.

Educate users: Release educational materials to help users understand the token’s functions and use cases, preventing legal issues arising from misunderstandings or erroneous expectations.

1. Prudent governance and operational models.

Decentralized governance: If the project claims to be decentralized, ensure that the governance structure is genuinely decentralized, allowing users to participate in decision-making processes. This reduces concentrated control by issuers or development teams, helping to prevent the SEC from classifying the project as a “security” controlled by a few.

Community-driven: Build strong community support and empower users through voting and other mechanisms, reducing reliance on core team members and further demonstrating decentralization.

1. Legitimate secondary market operations.

Control market manipulation risks: In secondary market operations, avoid manipulating market prices, ensuring that all market transactions are fair and transparent. Regularly monitor market behavior to prevent manipulative actions that could draw SEC attention.

Compliance listing: Before listing the token, ensure that the exchange meets local legal requirements, particularly when listing in the U.S. Choose exchanges that already comply with SEC regulations.

1. Prepare for future legal challenges.

Emergency preparedness: Have contingency plans in place for legal challenges, including selecting legal defense teams and strategies for communicating with regulators. Be ready to respond quickly if faced with regulatory investigations.

Collaborate with regulators: If regulatory environments change, actively work with regulators to demonstrate your willingness to adjust the project to comply with new rules, which can reduce conflicts and potentially lead to settlements.

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