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SEC Guidance Almost Shut Down My Business Before It Launched. Here's How You Can Handle These Types of Unexpected Challenges.

As an entrepreneur, you will encounter unforeseen challenges. Here are six steps on how to meet them.
SEC Guidance Almost Shut Down My Business Before It Launched. Here's How You Can Handle These Types of Unexpected Challenges.
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How many entrepreneurs can say that one morning they woke up to news reports that their big idea might be suddenly crushed by regulators?

Not many, I’d wager. At least not outside of the legal weed industry, which has been living in a kind of legality limbo since Jeff Sessions was named Attorney General.

But, here I was, a software developer and self-professed geek (about the furthest thing possible from a cannabis trafficker) building an open-source platform for corporate IT software, and for one morning this summer it seemed my big project might be dead on arrival.

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You see, my co-founders and I were planning an initial coin offering, or ICO, in which we plan to raise the largest open-source software fund. ICOs have become a popular way to pay for new businesses via offerings of cryptocurrency “tokens” enabled by blockchain technologies. Without getting too technical, we planned for an ICO to raise the funds to support a community of developers to create the next generation of cloud software for large enterprises.

So when the Securities and Exchange Commission suddenly issued guidance in July that suggested some of these ICOs would be viewed as securities, it struck at the heart of what we were building.

And -- this was the kicker -- the early reports said that these “unregistered offerings could be subject to criminal punishment.” I still feel a slight gravity drop as I write those words.

We had anticipated the SEC would weigh in on the issue at some point, but we had no idea what they were going to say. This seemed to be the dream-killing scenario.

It turned out that the media report was overly sensational. After a month of research and discussion with legal counsel, we are launching our ICO in September with some confidence we will not be locked up for it. But, had we panicked and mishandled the situation in those critical first hours, the entire enterprise might have been sunk. It proved to be a learning experience, one that, to be honest, we’re not even a little bit grateful for.

In those first moments and hours of crisis, our project’s survival and the financial well-being of our investors and employees depended upon decisions we had to make quickly and wisely.

In retrospect, it feels to me and my co-founder that we had luckily picked our way through the crisis in ways that could provide helpful for any entrepreneur caught up in a crisis. Perhaps this is a roadmap on crisis management that could help others when lightning strikes.

Related Video: What to Do When Your Company Is In Full-On Crisis Mode

1. Suspend panic, find your co-founder.

When the story hit my email, I was on the phone with my co-founder discussing a presentation we were going to make to potential investors. I scanned the story, which said -- at least from my immediate impression of it -- all unregistered ICOs were hereby banned, with violators facing criminal charges.

“We need to break,” I told my co-founder, “because I just got an email that may have ended it all.” I now regret saying that, because I clearly didn’t have all of the facts. But, it certainly demonstrates what a jolt the news had delivered.

Jumping to this conclusion was a mistake, one that could have been costly if I’d been in mixed company or speaking to investors. I recovered my composure, and we stayed on the line. Even if your first reaction is to run and hide, it’s better to find your closest confidant when chaos strikes. We sorted through it together.

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2. Skip to the source material.

Reacting to rumors, third-party reports or, as in our case, early news reports, only muddies the situation. It was the SEC’s ruling we needed to read, not a first-take story from a reporter scrambling to beat the competition.

Past the Chicken Little headline and scary lead paragraph was a link to the SEC document. I forwarded that link to my partner, and we stayed on the line together silently reading the official report -- all 25 pages of legalese -- that would rule our future. It was incredibly tense.

After absorbing the document and having a calm discussion, we decided we were of one mind: The SEC wasn’t talking about us. To put it simply, the SEC had ruled some companies issuing tokens may in doing so create securities, but others don’t. The cryptocurrency Ethereum was judged to be a currency, not a security, for instance. The SEC even cited a test that could be used to determine if an ICO was issuing securities, and -- taken at face value at least -- we were in the clear. We felt marginally better.

3. Talk to the experts. Do not delay.

Only marginally, though. Our conclusion was based on experience with cryptocurrencies like Bitcoin, as well as familiarity with the ugly demise a few years ago of a blockchain company that ruined several investors and which attracted the SEC’s attention in the first place.

We needed advice, from our lawyers for a start, then from people we know and trust who deal with regulators and these specific issues professionally. We were fortunate to have such people among our advisers, our directors and other men and women we’ve met through our professional networks. We were able to reach them within hours.

They made a compelling case to move forward. There are many legal risks that we've had to get comfortable with over the next few months. This was a new bar.

4. Follow your conscience

Since our particular case wasn’t the one the SEC addressed, and the regulator left other areas murky, we are still in a gray area. Our lawyers and advisers can all advise us, and will even give us a written opinion that our project isn’t going to be viewed as issuing a security. But these are still opinions. Ultimately, we are the ones creating a project we believe can benefit thousands of users, and we’re responsible for bringing into the world.

In ambiguity, it’s your conscience that provides direction. Without that gut check, proceeding would have been reckless. We have employees who rely on us, and a tech community that will lose the benefit of our project without us.

Related: 25 Common Characteristics of Successful Entrepreneurs

5. Communicate clearly as soon as you’re able

The next day we sent an email to our partners and employees to address the story, the SEC’s decision, our interpretation of it and our roadmap forward. Had we not gotten to this point within the first 24 hours, our team would have assumed we either weren’t on top of the issue or were somehow trying to duck it.

We also didn’t want to oversell our confidence. After providing our analysis of the situation, we wrote: “This doesn’t change our plan. This doesn’t mean we aren’t in ambiguity, so please give us feedback.”

What we didn’t do was act passively. I couldn’t just forward the article to everyone on Day one and say, “What do you think?” That’s not adult behavior. The way to handle it was to demonstrate that we were handling it, but not before we had a measure of insight to share.

6. Keep talking, keep digging

The last piece was to iterate from there. When questions were raised, we followed up and followed through. We’ve maintained transparency on our position, and continued to acknowledge what is still unclear. We speak to any expert we can find, and narrow the risks.

In any ambiguous moment, you may not be able to reduce the risk to zero. You may need to make decisions while you still have a wide margin for error. You might instinctively want to hide or be overly transparent. It really is a balance.

If you get it right, you live to fight another day.