The SEC recently announced that it is clamping down on the “wild west” of Initial Coin Offerings (ICOs), which in turn sent shockwaves through the blockchain community; particularly young companies executing token sales on Ethereum. The regulatory body released a comprehensive report into the failed DAO project, as well as a declaration that ICOs may fall under US securities laws.
This news was reported in CNBC, Fortune, Inc., Bloomberg, VentureBeat, Reuters, CoinDesk, and many others. Several prominent CEOs in blockchain offered their companies thoughts on the clamp down and the future of ICO’s.
Ron Chernesky, investFeed CEO (Social trading platform dropping US equities for crypto) says that his company welcomes it, and actually thinks it’s a step in the right direction for the industry. Before yesterday’s announcement, it was common knowledge that ICOs have been enveloped in a regulatory grey area, but investFeed spent a lot of their resources on best-in-class legal counsel and compliance to ensure that they conducted theirs right. One of the most telling pieces in the SEC announcement was an acknowledgement that some ICOs are completely fair investments, and some are not. InvestFeed ICO falls into the former category. Just like any other opportunity, there are inherent risks involved, and ICOs are no different. The SEC is warning investors to be aware of the risks, and ensure they do their due diligence on the company conducting it, the structure of the token generation event, the team behind it, and the product roadmap.
Perry Woodin, CEO of Node40, a Blockchain accounting and governance firm, states “Breakthrough advancements in technology often give way to rapid acceleration of new business ideas. The number of businesses supporting blockchain applications have exploded over the past couple of years, and with them Node40 has seen new tools for raising capital. The issues that crop up during these cycles of rapid business acceleration often lead to individuals taking a chance with compliance. As they have seen with blockchain, those taking a position that their actions fall into a legal grey area are often shocked to find that compliance is black or white. If companies are aiming for the middle ground, they will likely find that they are not in compliance and subject to existing, or yet to be defined regulations. The SEC’s report on ICOs was not a surprise. Many of the ICOs were aiming for that compliance grey area. They wanted their offerings to be considered “crowdfunding” even though they could not meet the requirements of the Regulation Crowdfunding exemption. Now let’s see what happens as companies attempt to fit within the SEC’s guidelines.”
The SEC had the ability to decimate the entire ICO market, and it fortunately has provided open possibilities, adds Jaron Lukasiewicz, CEO of the stealth blockchain project WORKFLOW.
WORKFLOW hopes the commission takes the ‘facts and circumstances’ approach outlined in its report so that blockchain companies can thrive in the US. They don’t think it’s a coincidence that the SEC chose to target a German company in its investigation. The agency is signaling that its rules will apply even to non-US token issuers. Given the wide array of token functionalities, they wish the SEC had been more clear about what types of tokens might not be viewed as a security by the agency.
Steven Nerayoff, a VC, attorney, and early Ethereum advisor who notably coined “GAS” declares that the SEC’s decision reinforces what the blockchain industry already knew: Federal securities laws apply to all new types of technologies. If anything sold has the characteristics of a security, one must follow U.S. securities laws. This is the case for all technologies. And it should be expected that any organization that fails to comply with the requirements of U.S. securities laws will be held responsible.
The standard test is an investment in a business where the buyer has a reasonable expectation of profits based on the efforts of others. It should come as no surprise that the SEC found that buyers of the DAO Token purchased a security. The key feature of the DAO Token was indeed an expectation of profit if the investments made by the DAO were successful, and thus the DAO Tokens were expressly sold as an investment. Unlike a token such as Ether, the DAO token had no other utility. Many people in the industry at the time were concerned about the DAO for the reasons stated by SEC.
Many of the token sales happening today are essentially pre-selling tokens providing access to a blockchain application or some other product, like Kickstarter. Unlike the DAO Tokens, such tokens are being sold for their utility, not as an investment.
“It must be noted that the SEC’s ruling is not specific to blockchain companies or digital tokens. As the SEC developed a more nuanced understanding of this burgeoning industry, it was inevitable that it would begin to develop a body of law and interpretations surrounding it. The blockchain industry as a whole should welcome the SEC’s decision as an important step towards improved regulatory guidance and clarity.”
Ari Meilich, Project Lead at Decentraland, a blockchain-based virtual world, feels the SEC weighing in represents public acceptance of blockchain instruments. The SEC said that the DAO tokens were a security, and that all securities must be registered according to the law. The market was anticipating this, and the price of non-security tokens, like Ethereum, did not fluctuate when the SEC report came out.
The importance of the SEC’s Investigative Report regarding the DAO cannot be overstated for the ICO industry says Coinsource, the world’s largest bitcoin ATM, General Counsel, Arnold Spencer. The SEC’s guidance provides everyone in the digital currency industry with two, clear messages. First, it is now clear that some digital currencies will be viewed as securities, depending on how the tokens or coins are structured. Secondly, and more importantly, it is now clear that the regulators and law enforcement in the United States will be enforcing these laws. The pipeline for ICO’s just got a lot smaller.
The SEC’s Investigative Report is not breaking any new, legal ground. For decades, regardless of whether it was stocks, loans, interest in oil wells, and now, digital currencies, the central focus has been on whether the instrument was for investment purpose or was for another substantive or practical purpose. If you buy an interest in a golf course to make money from the business, it is a financial investment and therefore a security. If you join a golf club to play golf, it is not a financial investment and not a security.
This is a major turning point. ICOs and other coin offerings that are primarily structured as investments will have to be registered with the Securities and Exchange Commission if they are marketed to U.S. investors. Issuers will have to choose between the expensive process of registering with U.S. authorities or foregoing to U.S. capital markets. Successful companies have gone down both these paths. But the era of quick ICOs in the United States based on an investment concept, and not based on a new functionality concept, is officially closed.
Mr. Spencer predicts some significant fallout for the companies that have conducted ICOs in the past six months that are structured similar to the DAO. Many ICOs are out there that will now be viewed definitively as securities, and yet are unregistered. These companies will now need to register as securities, an expensive process that they may or may not be able to pay for, or they will risk being on the wrong end of an enforcement action.
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