On Tuesday, the SEC ruled that some of the coins offered for sale by ICOs are actually a security and subject to their authority. For regular readers of this blog that’s probably no surprise as we talked about what is a security way back in 2013 with our Legal expert Jonathan Wilson where we talked about the Howey case. One of the interesting conclusions from it, especially in crowdfunding, is that while buying a whole loan from someone (a mortgage or equipment lease) is not a security, buying a piece of a loan IS a security. Click on the link and check out that article from the wayback machine.
Remember the DAO? This attempt to set up a decentralized autonomous organization on Ethereum, essentially an investment corp run by no one, is what led to the SEC investigation and this decision. Fortune reports that that SEC conclusion in their report and investigation on the DAO is exclusively for the DAO, however, they are clearly providing additional insight including their understanding that the ICO style fundraising is here to stay. This alone is an important acknowledgment.
As reported on Coindesk, the head of the SEC Enforcement division says ‘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.’ The SEC published an Investor Bulletin with opinions, facts, and warnings for investors in ICOs. You should read it.
Reactions So Far
Reaction to this decision has been mixed. It’s natural for some people to think that since Bitcoin is transnational and moves across borders so easily that attempts to regulate anything by any one government are just going to fall on deaf ears.
However, there’s lots of crypto investing and innovation in the US so what the Feds say does matter. Many in the space, especially attorneys in the crypto and securities space were not surprised by the decision
The creator of the Token Summit believes it's a positive move saying the SEC ‘addressed a couple of the weakest links in the ICO value chain’. He further believes it will help the whole crypto investing industry improve. I hope he’s right.
VentureBeat goes so far as to say that the blockchain industry is now on alert that it is regulated. They rightly point out that there is good from this. The ability to scam investors from ICO issuance should go down. The bad, that they also rightly point out, is that ICO issuers are likely to just move elsewhere and issue their ICOs with Dubai, Singapore, and Zug, Switzerland likely leading the way for relocation.
One thing is for sure, it will be different now. How we don’t know but it will be different. Stay tuned to see what happens next….