Virtual currencies have been around since 2009 (or 1998, depending on how you look at it); yet, legal and regulatory questions remain. Are digital currencies securities? Is it OK to sell tokens, even if you’re not registered with the SEC or state equivalent? Are Initial coin offerings subject to the Securities and Exchange Acts?
Recently, the SEC issued an investor alert (in an attempt) to clarify these quandaries. Let’s review three takeaways from the memo.
SEC Cryptocurrency Alert Point #1: The SEC Is Open To Blockchain Opportunities
Sure, the Securities and Exchange Commission is a regulatory body, but they’re not opposed to market opportunities.
In its recent alert, the agency enthused that ICOs “may provide fair and lawful investment opportunities.” The memo, however, also warned that some ventures “can be used improperly to entice investors with the promise of high returns in a new investment space.”
SEC Cryptocurrency Alert Point #2: Some Investment Opportunities Fall Under The Securities Umbrella; Others Don’t
Are digital currencies securities? It’s the temporal chicken or egg dilemma of our, financial, times. And like the fowl-centric brain teaser, the answer remains elusive. Yes, various regulatory bodies and judges have deemed certain crypto-investment opportunities — particularly initial coin offerings — securities that are subject to financial regulations. However, officials have yet to establish a consensus, and virtual tokens aren’t necessarily considered securities in and of themselves — though many ICOs are.
The SEC ICO Investment alert advised:
“Depending on the facts and circumstances of each individual ICO, the virtual coins or tokens that are offered or sold may be securities […] subject to the federal securities law.”
SEC Cryptocurrency Alert Point #3: The DAO ICO Violated Regulations
In 2015, The DAO — a.k.a., The Decentralized Autonomous Organization — held an initial coin offering that netted about $150 million. Unfortunately, the best laid plans of mice and DAO went awry: hackers exploited a hole in the overlaying code — not the blockchain — and siphoned $50 million.
In its alert, the SEC made an example of the DAO ICO — ultimately deeming it in violation of securities regulations. Ars Technica succinctly summarized the SEC’s position: “If coin owners are promised voting rights in an organization or the right to a share of profits, that’s likely to be a security. By contrast, if users mostly buy tokens for a utilitarian purpose—for example, to buy network storage—it’s less likely to be a security.”
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Cryptocurrency rules are in flux. Details and jurisdictions matter. Our firm works with blockchain startups, token exchanges, and other types of businesses servicing the digital currency ecosystem. Get in touch today to begin the conversation.
Roof, K. (2017, July 25). SEC regulators are coming after ICOs. Retrieved September 18, 2017, from https://techcrunch.com/2017/07/25/sec-regulators-are-coming-after-icos/?ncid=mobilenavtrendLee, T. B. (2017, July 26). Using a blockchain doesn’t exempt you from securities regulations. Retrieved September 18, 2017, from https://arstechnica.com/tech-policy/2017/07/using-a-blockchain-doesnt-exempt-you-from-securities-regulations/
Popper, N. (2017, July 25). S.E.C. Issues Warning on Initial Coin Offerings. Retrieved September 18, 2017, from https://www.nytimes.com/2017/07/25/business/sec-issues-warning-on-initial-coin-offerings.html?_r=1
Investor Bulletin: Initial Coin Offerings. (2017, July 25). Retrieved September 18, 2017, from https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-initial-coin-offerings