US Rules ICOs and Token Sales are Sales of Securities


Legal implications are being assigned to blockchain projects in the US as the Securities and Exchange Commission has ruled that investment methods employed by blockchain-based projects – such as Initial Coin Offerings or Token Sales – will be treated as a sale of securities, regardless of how they are named. In an investigative report, the SEC warned that participants in this nature of activity will be subject to the requirements of federal securities laws.

This news will have a huge effect on blockchain companies who are planning to, or in the process of, launching ICOs from the US, as well as ICOs worldwide, which will either have to register for sale in the US or risk investment from America being cut off. it is possible that this will result in blockchain development moving away from US and into other countries which have fewer restrictions, and that US citizens will attempt to circumvent the restrictions by using work-arounds off-shore accounts or the pseudo-anonymity of cryptocurrencies. However, despite the reservations that some may have, many are seeing the decision as a positive move.

CEO of investFeed, a social trading platform dropping US equities for crypto, Ron Chernesky stated: “We welcome it, and actually think 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 we spent a lot of our resources on best-in-class legal counsel and compliance to ensure we conducted ours 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. We fall 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.”

The SEC came to this conclusion following an investigation into the previous case of the DAO, which sold tokens in exchange for Ether and was neither a broker-dealer or registered with the SEC. it now requires such activity to be registered unless exempted. People who take part in unregistered offerings will need to be wary as they risk violating securities laws. This ruling also affects exchanges which participate in these events, unless an exemption applies to them as well. In doing this, the protection of investors will be improved but not all will welcome the change, seeing it as a restriction from an outside agency in what is designed to be a decentralised – and therefore unrestricted – medium.

SEC Chairman, Jay Clayton explained: “The 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.”

Despite reaching this conclusion, the SEC has decided not to bring charges against anyone involved with the DAO, but rather has cautioned the industry and participants that – regardless of the organisation, currency or technology being used – in the US, token sales, ICOs or funding of such nature will now be treated as a sale of securities and will be considered under federal securities laws. Alongside this announcement, the SEC’s Office of Investor Education and Advocacy provided information to investors in ICOs, raising awareness of disclosure requirements and the dangers of fraud which potential investors should be aware of.

Director of the Division of Corporation Finance, William Hinman stated: “Investors need the essential facts behind any investment opportunity so they can make fully informed decisions, and today’s report confirms that sponsors of offerings conducted through the use of distributed ledger or blockchain technology must comply with the securities laws,”

Perry Woodin, CEO Node40, a blockchain accounting and governance firm, remarked: “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 we’ve 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 we 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 you’re aiming for the middle ground, you will likely find yourself out of 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 we’ll see what happens as companies attempt to fit within the SEC’s guidelines.”

This SEC investigation was conducted in the New York office by members of the SEC’s Distributed Ledger Technology Working Group (DLTWG) — Pamela Sawhney, Daphna A. Waxman, and Valerie A. Szczepanik, who heads the DLTWG — with assistance from others in the agency’s Divisions of Corporation Finance, Trading and Markets, and Investment Management. The investigation was supervised by Lara Shalov Mehraban.