ICO’s and Enforcement Proceedings

Posted by on February 19, 2018

ICO’s and Enforcement Proceedings- Today is the continuation in a LawCast series talking about the newest SEC and regulator statements on ICO’s and related enforcement proceedings.

On January 4, 2018, Chair Clayton, Commissioners Kara Stein and Michael Piwowar issued a statement commending the North American Securities Administrators Association’s (NASAA) own statement made the same day addressing concerns with ICO’s and cryptocurrencies.  The NASAA is a group comprised of state securities regulators.

The SEC’s top brass specifically point out that cryptocurrencies are not, in fact, currencies in that they are not backed or regulated by sovereign governments and seem to be focused on a method of capital raising as opposed to mediums of exchange.  Reiterating its other messaging, the SEC reminds the public that offerings and their participants must comply with the state and federal securities.

The NASAA statement on cryptocurrencies and ICO’s begins with a consistent theme to the SEC, warning Main Street investors to be cautious about investments involving cryptocurrencies.  The NASAA, also like the SEC, encourages potential investors to conduct due diligence and ask questions before making an ICO (or any) investment.

The NASAA includes a laundry list of risks and issues with ICO’s and crypto-related investments.  The NASAA points out that unlike FIAT or traditional currencies, cryptocurrencies have no physical form and typically are not backed by tangible assets (though I note that this is a void that is quickly being addressed by new tokens backed by physical assets and commodities).

Furthermore, cryptocurrencies are not insured, not controlled by a central bank or other governmental authority, are subject to very little if any regulation, and cannot be easily exchanged for other commodities.  Cryptocurrencies are susceptible to breaches, hacking and other cybersecurity risks, including on both the ICO issuer side and the investor side through direct breaches into a wallet or other digital storage.  ICO’s are a global investment vehicle and, as such, US regulators may have no ability to recover lost funds or pursue bad actors.  Likewise, private civil proceedings could prove futile.

Moreover, the high volatility and high risk of cryptocurrency investments make them unsuitable for most investors.  In both its statement and a very simple investor-directed animated video on the subject, the NASAA clearly states that investors could lose all of their money in a crypto-related investment.

Regulators almost unanimously believe that cryptocurrencies involve a high risk of fraud.  The NASAA includes a list of obvious red flags, including guaranteed high returns, unsolicited offers, sounds too good to be true, pressure to buy immediately, and unlicensed sellers. The NASAA now lists ICO’s and cryptocurrency-related investment products as an emerging investor threat for 2018.