SEC DAO Report on Initial Cryptocurrency Offerings (ICOs)




Posted by on October 02, 2017

SEC DAO Report on Initial Cryptocurrency Offerings (ICOs)- Today is the first in a LawCast series talking about the recent SEC investigation and public statements on initial cryto-currency offerings or ICOs. On July 25, 2017, the SEC issued a report on an investigation related to an initial coin offering (ICO) by the DAO and statements by the Divisions of Corporation Finance and Enforcement related to the investigative report.  On the same day, the SEC issued an Investor Bulletin related to ICO’s.  Offers and sales of digital coins, cryptocurrencies or tokens using distributed ledger technology (DLT) or blockchain have become widely known as ICO’s.  In a prior LawCast series, a introduced the topic of DLT, also known as blockchain.

The basis of the SEC report is that offers and sales of digital assets, including cryptocurrencies, are subject to the federal (and state) securities laws.  From the highest level, the nature of a digital asset must be examined to determine if it meets the definition of a security using established principles and in particular the Howey Test.

All offers and sales of securities must either be registered with the SEC or there must be an available exemption from such registration.  This statement applies to cryptocurrency securities in the same manner it applies to all other securities.  In addition, participants in ICO’s are subject to federal securities laws to the same extent they are in other securities offerings, including broker-dealer registration requirements.  Securities exchanges providing for trading must register unless an exemption applies.

Despite the SEC findings, it declined to pursue an enforcement action but rather used the opportunity to inform the public on its views and, in particular, that “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.”

In the press release announcing the investigative findings, SEC Chair Jay Clayton stated, “[T]he SEC is studying the effects of distributed ledger and other innovative technologies and encourages market participants to engage with us.  We seek to foster innovative and beneficial ways to raise capital, while ensuring – first and foremost – that investors and our markets are protected.”

This is not the first time the SEC has addressed registration and exemption requirements associated with cryptocurrencies.  There have been several other cases.  For example, in December 2014 the SEC settled charges against BTC Virtual Stock Exchange and LTC Global Virtual Stock Exchange related to violations of both the broker-dealer registration requirements and the securities offer and sale registration requirements.

This LawCast series will summarize the SEC Report of Investigation, statements by the Divisions of Corporation Finance and Enforcement and the Investor Bulletin on Initial Coin Offerings.