Initial coin offerings, or ICOs, those blockchain technology-backed investments that have captured the imaginations of investors and skeptics alike, have appeared and will continue to appear in SEC enforcement subpoenas and examination requests in the coming months.
For RIAs and BDs, who suffer from heavier regulatory oversight than, for example, an ICO issuer sitting offshore, receiving such a subpoena or exam request should not come as a surprise.
In July, the SEC issued its first report on this topic concluding that some ICOs are in fact securities, meaning that the federal securities laws apply. At the same time, the SEC issued a bulletin to investors warning about various risks associated with ICOs.
SEC Chairman Jay Clayton followed these pronouncements with a speech in which he said “it would shock me if you don’t see pump-and-dump schemes in the initial coin offering space,” specifically pointing out that the agency’s enforcement division is seeing infractions in the space.
Lo and behold, on Sept. 29, the SEC sued two ICO issuers purportedly backed by investments in real estate and diamonds, alleging fraudulent representations.
So, the SEC ICO subpoenas are out there and will continue to come. Many recipients of the subpoenas will be tempted to immediately push back and insist that their ICO doesn’t involve a security and, accordingly, the SEC has no business asking questions.
While that may be a worthwhile position to take for ICOs that obviously don’t involve investor expectations of profits from the efforts of others, the legal definition of “security” is flexible enough to cover many types of investments, and the SEC is unlikely to be persuaded by anything but the most extreme examples falling outside that definition.