US SEC Spotlights ICOs

ICO’sThe Securities and Exchange Commission (SEC) recently featured Initial Coin Offerings (ICOs) in their “spotlight” section.

While digital currency has currently been deemed a commodity in the USA, and therefore under the jurisdiction of the Commodities Futures Trading Commission (CFTC), the SEC considers certain ICOs securities are under its purview.

In their profile, The SEC noted: “Companies and individuals are increasingly considering initial coin offerings (ICOs) as a way to raise capital or participate in investment opportunities. While these digital assets and the technology behind them may present a new and efficient means for carrying out financial transactions, they also bring increased risk of fraud and manipulation because the markets for these assets are less regulated than traditional capital markets. That’s why we are providing this information about the three “Rs” of ICOs: Risks, Rewards and Responsibilities.

The SEC said investors in ICOs should keep these five things in mind:

  • ICO’s can be securities
  • They may need to be registered
  • Tokens sold in ICOs can be called many things
  • ICO’s may pose substantial risks
  • Ask questions before investing

The SEC further noted that tokens can be sold internationally, recommended researching the professional who recommends them, and “if an investment sounds too good to be true, be cautious.”

In August 2017, the SEC issued an investor alert for ICOs.

The agency stated then: The SEC’s Office of Investor Education and Advocacy is warning investors about potential scams involving stock of companies claiming to be related to, or asserting they are engaging in, Initial Coin Offerings (or ICOs).  Fraudsters often try to use the lure of new and emerging technologies to convince potential victims to invest their money in scams.  These frauds include ‘pump-and-dump’ and market manipulation schemes involving publicly traded companies that claim to provide exposure to these new technologies.”

In January, the SEC halted an ICO for the digital currency, Arisecoin, not only deeming it a security but stating that it failed to properly register its security.

SEC Seal“AriseBank began raising money at least as early as November 2017, through a securities offering of AriseCoin—its own digital currency. AriseCoin is being offered in an initial coin offering through which Arisecoin claimed to have raised $600 million, with a goal of a $1 billion.” The order stated. “The ICO is an illegal offering because there is no registration statement filed or in effect with the SEC, nor is there an applicable exemption from registration.”

What is a Security?

The ICO question will almost certainly have ramifications for US regulations beyond digital currency, contributing further to defining-legally- what is a security.

As noted earlier, the SEC has deemed certain ICOs securities.

But the US does not operate by executive fiat, so both the judicial and legislative branches will also weigh in before it’s determined when an ICO is considered a security.

This is known as checks and balances and the separation of powers in the Constitution.

The definition of a security is a “Trading securities are investments in debt or equity that management plans to actively trade for profit in the current period. In other words, trading securities are stocks or bonds that management plans to purchase and sell in order to make money in the short term.” According to the website My Accounting Course.

By that definition, the SEC certainly appears to have broad powers but legal challenges and possibly legislation will come before this is clarified.

Congress is already taking an active role in oversight, on Wednesday March 16, 2018, the House Financial Services Committee will hold a hearing entitled:Examining the Cryptocurrencies and ICO Markets