The SEC has started to examine whether it is illegal to sell ICO tokens that are distributed through a cryptographic blockchain. They also have begun to redefine the term «exchange» in the financial industry, which could affect ICOs as well.
ICOs rely on the same blockchain technology as Bitcoin
ICOs (initial coin offerings) are a relatively new phenomenon. They are essentially crowdfunding projects that raise funds through the use of a specialized form of crypto currency. There are a number of ICOs, including MasterCoin, Frizzo-Barker et al, Catalini and Gans, among others. Despite their nascent status, ICOs have managed to make a splash. Their use of digital technologies has opened up the financial sector to a broader set of players, thus allowing the economy to function in even the most dire of scenarios.
A number of factors are at play when it comes to the ICO of the year. First and foremost is the availability of quality code. Not only does it help the project meet its ICO campaign requirements, it also increases the likelihood of success.
U.S. securities laws may apply to blockchain tokens
As the popularity of cryptocurrencies like Bitcoin and Ether continue to rise, the Securities and Exchange Commission (SEC) continues to investigate potential violations of federal securities laws. This article provides a high-level overview of the crypto and token industries and how federal securities laws may apply to these products.
Tokens may be classified as securities if they are offered to a private individual for the purpose of investing. Whether an offering meets the definition of a security requires an analysis of the facts and circumstances surrounding the sale.
A private token offering may qualify for an exemption from registration under Rule 701 of the Securities Act. However, if the tokens are distributed outside the United States, the issuer may be subject to federal securities laws.
The SEC has issued guidance on the application of federal securities laws to digital assets and token sales. These recent announcements are intended to provide guidance for companies seeking to raise funds through token sales. Ultimately, the SEC will decide whether an offering is an investment contract or an unregistered security.
SEC’s new Cyber Unit
SEC’s newly formed Cyber Unit targets a range of cyber misconduct. It will seek to halt attacks on trading platforms, hacking for nonpublic information and spread of false information through social media.
The unit will be led by Robert Cohen, former co-chief of the Market Abuse Unit. Among its priorities are ICOs and market manipulation through cyber means.
SEC’s new Cyber Unit also will target violations involving distributed ledger technology. In the past six months, the unit has filed two enforcement actions against promoters of ICOs.
PlexCoin was advertised as the «next decentralized worldwide cryptocurrency». The ICO promised investors a return of 13-fold in 29 days. However, the digital tokens were a blatant rip-off. Similarly, Sabrina Paradis-Royer diverted proceeds from an ICO to improve her home.
SEC announced the formation of the Cyber Unit in late September. It will consist of a team of attorneys, data analysts and investigators.
SEC redefinition of the term «exchange»
The Securities and Exchange Commission (SEC) has been working on a redefinition of the term «exchange» that will affect many industries. If adopted, the proposed rule would expand the boundaries of the exchange industry and subject a number of previously unregulated trading venues to SEC regulation.
According to a recent report, the new definition would extend beyond the traditional exchange to include any organization that provides a communications protocol system, including anyone who provides a platform for buying and selling a digital asset. In addition, the rule would require any person or organization that meets the new definition to register as an exchange. This could have dire consequences for holders of digital assets.
Some observers opine that the SEC’s proposed definition is over-broad and arbitrary. Others point out that Congress has the ultimate authority to draw the lines between public and private markets.
SEC’s lawsuit against Ripple
The SEC’s lawsuit against Ripple could have major ramifications for the industry. It’s a landmark case that could affect future SEC litigation, and will also change regulations.
XRP, Ripple’s native token, is being disputed as a security by the SEC. The agency claims that Ripple violated the law by selling unregistered securities. In addition, the SEC is arguing that Ripple acted in personal enrichment of its CEO, Christian Larsen.
The SEC’s theory is not supported by the caselaw. The agency claims that XRP is a security based on the representation that an investment contract is entered into. However, the SEC’s theory has not been supported by federal securities laws.
The SEC’s claim is a draconian one. It would mean that the token must remain tied to the initial purchaser. This would destroy the entire industry. If the agency wins its case, it could set a dangerous precedent.