Yesterday Crypto Insider published a roundup of recent articles with practical advice to Initial Coin Offering (ICO) planners. The difference between your ICO and an IPO must be “BIG,” noted one of the articles, “or the SEC will come after you!” In fact, the SEC said yesterday that ICOs should be subject to the same safeguards required in traditional securities sales, Reuters reports.
“The US Securities and Exchange Commission (SEC) issued an investigative report today cautioning market participants that offers and sales of digital assets by ‘virtual’ organizations are subject to the requirements of the federal securities laws,” states the SEC press release.
“Whether a particular investment transaction involves the offer or sale of a security – regardless of the terminology or technology used – will depend on the facts and circumstances, including the economic realities of the transaction.”
Following an inquiry into whether The DAO and associated entities and individuals violated federal securities laws, the SEC issued a Report of Investigation claiming that found that tokens sold by The DAO” were securities and therefore subject to the federal securities laws.
“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.”
“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,” added William Hinman, Director of the Division of Corporation Finance.
However, the SEC has decided not to bring charges in this instance, or make findings of violations in the Report, but rather to caution the industry and market participants.
“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.
“As the evolution of technology continues to influence how businesses operate and raise capital, market participants must remain cognizant of the application of the federal securities laws,” added Steven Peikin, Co-Director of the Enforcement Division.
Reading between fluff and bureaucratese, the take away message seems to be:
“[The] federal securities laws apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology.”
While only wealthy accredited investors meeting strict requirements issued by national regulators can invest in private companies, anyone can invest in an ICO, even anonymously.
Unless, that is, the authorities step in with ICO regulations. The SEC report represents a step in this direction, and it appears that China is considering similar steps.
The advice in our yesterday’s post: “tokens should not represent fractional ownership of a project, but access rights, use rights and payment means within the project’s ecosystem,” seems safe and compliant with the spirit of the new SEC report.
However, it can be argued that the real innovation brought by ICOs is precisely their potential to permit investing in promising projects, with fractional ownership rights, to anyone, anywhere, not only to “accredited investors” in one country.
In fact, current securities regulations are too strict, and deny less wealthy people the chance to invest in promising ventures at an early stage. Also, too much regulation can stifle development by making access to funding too difficult for ambitious projects based on emerging, yet unproven technologies.
It’s worth bearing in mind that the US are not the whole world. History, basic economic theory, and elementary logic show that, if over-regulation makes innovation too difficult in one country, the innovators will just move their operations somewhere else.
The SEC wants to regulate the activities of “those who offer and sell securities in the United States,” but enforcing regulations against projects that are not located in the US, and don’t use US banks, seems difficult to say the least. Chances are that, if US citizens or residents want to spend bitcoin or ether to participate in an ICO launched from anywhere in the world, they’ll just continue doing so.
Picture from Wikimedia Commons.