In this highly evolving regulatory environment, this post is meant to share general insights gained from our research of developing public policy and also speaking with legal counsel from top firms involved with Securities Law and the emerging cryptocurrency space.
Contents
Who Should Care
Startup companies and individuals who are involved with working with blockchain technology and cryptocurrencies using Initial Coin Offerings (ICOs) as a way to raise funds.
What Does The SEC Say?
December 11, 2017
SEC Chairman Jay Clayton, released the official Statement on Cryptocurrencies and Initial Coin Offerings. This statement addresses the current state of public policy and share considerations for Main Street investors and market professionals. While he seems optimistic about the emerging industry, the key takeaways were to be cognizant of the Securities Exchange Act of 1934 and conservative regarding compliance with the SEC regulations. While not all blockchain and cryptocurrency projects are automatically considered a security, it is still of utmost importance to take the proper measures to ensure compliance with the securities laws.
Merely calling a token a “utility” token or structuring it to provide some utility does not prevent the token from being a security.
I believe that initial coin offerings – whether they represent offerings of securities or not – can be effective ways for entrepreneurs and others to raise funding, including for innovative projects. However, any such activity that involves an offering of securities must be accompanied by the important disclosures, processes and other investor protections that our securities laws require. A change in the structure of a securities offering does not change the fundamental point that when a security is being offered, our securities laws must be followed.[4]
He also cautions market participants against promoting or touting the offer and sale of coins without first determining whether the securities laws apply to those actions.
Selling securities generally requires a license, and experience shows that excessive touting in thinly traded and volatile markets can be an indicator of “scalping,” “pump and dump” and other manipulations and frauds.
In other words, individuals and marketing professionals should be conscientious of how they handle “referrals” or publicizing opportunities with ICOs. For example, getting paid a flat fee directly for marketing services is different than getting paid as a percentage of funds raised. The latter must be a registered with the SEC as a broker. Regardless, it will be important to consult with your legal counsel for the best practices and to keep up to date with your guidelines for promotion.
February 6, 2018
A United States Securities and Exchange Commission (SEC) and Commodities and Futures Trading Commission (CFTC) senate hearing was held on February 6 2018. SEC chairman Jay Clayton emphasized that initial coin offerings (ICOs) will be met with tighter regulations, while “true cryptocurrencies” will be embraced with smart policies.
At the hearing, he emphasized that every ICO token the SEC has seen so far is considered a security. Clayton explained that if a crypto-asset issued by a company increases in value over time based on the performance of the company, it is considered a security. He maintains that a change in the structure of a securities offering (as in the case with cryptocurrencies), does not change the fundamental point that an offering is being made—and therefore the securities laws must be followed.
Important Policies To Pay Attention To
Securities Exchange Act of 1934
Watch February 6, 2018 SEC & CFTC Cryptocurrency Hearing
Reference Links
https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11
https://cointelegraph.com/news/sec-hints-at-tighter-regulation-for-icos-smart-policies-for-true-cryptocurrencies
https://cointelegraph.com/news/sec-and-cftc-hearing-more-legitimate-icos-or-if-there-was-no-bitcoin-there-would-be-no-blockchain
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