The Securities and Exchange Commission (SEC) has informed market participants that Initial Coin Offerings (ICOs) are subject to the same requirements of the federal securities laws as traditional securities sales.
“The SEC is studying the effects of distributed ledger and other innovative technologies and encourages market participants to engage with us,” said SEC Chairman Jay Clayton. “We seek to foster innovative and beneficial ways to raise capital, while ensuring – first and foremost – that investors and our markets are protected.”
The Report of Investigation recently published by the SEC underlines the necessity to register offers and sales of distributed ledger or blockchain technology-based securities as well as securities exchanges providing for trading in these securities unless they are subject to exempt. Otherwise, traders will be liable for violations of the securities laws. The SEC aims to control that investors are sold investments that include all the proper disclosures and are subject to regulatory scrutiny for investors’ protection.
“The innovative technology behind these virtual transactions does not exempt securities offerings and trading platforms from the regulatory framework designed to protect investors and the integrity of the markets,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.
The SEC reports that the “virtual” organization “The DAO” created in April 2016 in fact offered and sold tokens that are subject to the federal securities laws. The DAO was initially claimed as a “crowdfunding contract”. However it was not a broker-dealer or a funding portal registered with the SEC and the Financial Industry Regulatory Authority and didn’t meet other requirements of the Regulation Crowdfunding exemption.
Having studied all the circumstances, the SEC decided not to bring charges in this particular case. The Report mostly focuses on warning of market participants to comply with the federal securities laws. They apply both to traditional companies or decentralized autonomous organizations, to securities purchased using U.S. dollars or virtual currencies, to securities distributed in certificated form or through distributed ledger technology.
“Investors need the essential facts behind any investment opportunity so they can make fully informed decisions, and today’s Report confirms that sponsors of offerings conducted through the use of distributed ledger or blockchain technology must comply with the securities laws,” said William Hinman, Director of the Division of Corporation Finance.
The SEC’s Office of Investor Education and Advocacy has issued an investor bulletin intended to inform investors about necessary protection that federal securities laws provide if virtual coins or tokens are securities. Investors should be aware of red flags of investment fraud bearing in mind that new technologies may be used to violate investment schemes.
The initiative of the SEC finds support of crypto experts.”We welcome it, and actually think it’s a step in the right direction for the industry. Before yesterday’s announcement, it was common knowledge that ICOs have been enveloped in a regulatory grey area, but we spent a lot of our resources on best-in-class legal counsel and compliance to ensure we conducted ours right”, Ron Chernesky, investFeed CEO, says.
“One of the most telling pieces in the SEC announcement was an acknowledgement that some ICOs are completely fair investments, and some are not. We fall into the former category. Just like any other opportunity, there are inherent risks involved, and ICOs are no different. The SEC is warning investors to be aware of the risks, and ensure they do their due diligence on the company conducting it, the structure of the token generation event, the team behind it, and the product roadmap.”
“The SEC’s decision reinforces what the blockchain industry already knew: Federal securities laws apply to all new types of technologies. If anything sold has the characteristics of a security, one must follow U.S. securities laws,” Steven Nerayoff, a VC, attorney, and early Ethereum advisor who notably coined “GAS”, echoes. “This is the case for all technologies. And it should be expected that any organization that fails to comply with the requirements of U.S. securities laws will be held responsible.”
Jaron Lukasiewicz, CEO of WRKFLOW, stealth blockchain project, agrees: “The SEC had the ability to decimate the entire ICO market, and it has fortunately has provided open possibilities. I hope the commission takes the ‘facts and circumstances’ approach outlined in its report so that blockchain companies can thrive in the US. I don’t thinkj it’s a coincidence that the SEC chose to target a German company in its investigation. The agency is signaling that its rules will apply even to non-US token issuers. Given the wide array of token functionalities, I wish the SEC had been more clear about what types of tokens might not be viewed as a security by the agency.”