The US SEC has raised concerns over the status of Circle’s stablecoin, USDC, as the company seeks to go public in a multi-billion dollar initial public offering (IPO), Barron’s reported on June 18, citing regulatory documents.
The SEC’s concerns are primarily related to the risks associated with USDC and other stablecoins potentially being classified as securities under US law. The watchdog expressed similar concerns in 2021 when Circle tried to go public via a special-purpose acquisition company (SPAC).
According to the report, the documents reveal an extended exchange between the SEC’s Division of Corporation Finance and Circle, spanning nearly a year.
The company has reportedly overcome most hurdles to an IPO despite the watchdog’s significant concerns. However, it is unclear whether its application will be approved as of press time.
SEC concerns
The SEC has requested that Circle disclose the risks associated with USDC if it is classified as a security under US law and the potential implications of being deemed an investment company. Circle complied with the SEC’s disclosure requests but declined to comment on the ongoing discussions.
Investment companies, such as mutual funds, are subject to stringent SEC oversight, including regular reporting and operational restrictions. If USDC were classified as a security, Circle would face increased costs and regulatory requirements, which would impact its business model.
Circle first attempted to go public in 2021 via an SPAC merger with Concord Acquisition Corp., which valued the deal at $9 billion. However, it was called off in December 2022.
The SEC had raised similar concerns at the time, including whether Circle should register as an investment company and whether its token could be considered a security, requiring additional disclosures and compliance measures.
The company filed confidential IPO paperwork in January, hoping to proceed through a traditional IPO route in its second attempt at going public. However, the SEC’s previous concerns have reportedly persisted, with the agency requesting detailed disclosures about the risks associated with USDC being classified as a security.
Security classification
Both designations could adversely impact Circle. Todd Phillips, a Georgia State University law professor, told Barron’s:
“If [Circle’s products] are securities, it becomes more expensive for Circle to operate, if they even can operate.”
Circle might need to register USDC or other assets that receive a securities designation, possibly preventing some company types from transacting in the assets. It could also be subject to fines, may need to register as a broker-dealer, and may need to allow customers to rescind earlier purchases.
If the SEC designated Circle an investment company rather than an operating company, Circle would be subject to closer SEC oversight. It would need to file regular holdings reports and abide by limits.
Other comments suggest that the SEC aims to protect itself rather than restrict Circle. Securities attorney Xavier Kowalski, who was not involved in Circle’s investment process, told Barron’s:
“The SEC wants to avoid doing anything in the registration review process that’s going to bite them later on an enforcement action.”
Kowalski said it was “pretty terrible” that the SEC’s concerns lasted eight months into the process but said the agency has seemingly satisfied its concerns about Circle’s IPO.