The cryptocurrency world is breathing a sigh of relief after U.S. regulators finally weighed in on initial coin offerings, saying that companies which raise money through the sale of digital assets must adhere to federal securities laws.
Prices of many of the more than $1 billion in digital coins already sold this year were little changed as issuers, analysts and attorneys said the Securities and Exchange Commission guidance late yesterday provides some long-sought clarity.
“It’s a step in the right direction for the industry as before yesterday’s announcement, it was common knowledge that ICOs have been enveloped in a regulatory gray area,” said Ron Chernesky, who is in the process of issuing tokens to be used in his trading platform InvestFeed Inc. “One of the most telling pieces in the SEC announcement was an acknowledgment that some ICOs are completely fair investments, and some are not.”
Here’s what some other industry participants and observers say may happen next.
What Tokens May Be Considered Securities?
It depends on the facts and circumstances of each transaction. What’s clear though, is that being a “virtual” organization, selling securities based on a distributed ledger, or the blockchain technology, in exchange for other digital currencies, doesn’t exempt it from securities laws. Steve Obie, a partner at the law firm Jones Day, said the legal standard called the Howey Test is the way to define whether tokens are securities.
“The SEC was straightforward in saying that each ICO has to be evaluated,” said Obie, a former top enforcement lawyer at the Commodity Futures Trading Commission. “Each part of the Howey Test has to be evaluated independently, there’s not one sign that defines whether a token is a security, rather all the factors have to be looked at globally.”
In the specific case of a startup known as DAO, the tokens that spurred the investigation, the SEC didn’t consider it a crowdfunding contract because among other things, it was not a broker-dealer or a funding portal registered with the SEC and the Financial Industry Regulatory Authority.
Who Can Be Liable?
Basically, everyone involved. The SEC said issuers of unregistered blockchain-based securities, those participating in unregistered offerings, and securities exchanges trading these securities are all liable for violations of the securities laws.
The consequence is that ICO participants should be more cautious, Obie said.