One of the more elusive concepts in the world of initial coin offerings has been the idea of a cryptocurrency or token that is not a security.

Such a non-security token could be offered for sale without the offering being registered or exempt from registration. Trading platforms could permit secondary transaction of the tokens without the platforms registering as exchanges or alternative trading systems.

A whole host of regulatory obligations on issuers, brokers, advisors and others would evaporate if a particular token were found not to be a security.

Does any token exist that is not a security? So far, the SEC doesn’t appear to have encountered one. Starting in July of last year with its DAO Report, the SEC has declared one token after another, after another, after another, after another, after another, after another to be securities.

SEC Chairman Jay Clayton reportedly went so far as to say, “I believe every ICO I’ve seen is a security.”

As a result, many issuers have concluded that it may be prudent to ensure that intial offerings are either exempt from registration or registered, as in the case of one issuer who recently launched the red herring for its Regulation A+ ICO in the form of warrant offering.

However, concluding that all virtual tokens are securities may be going too far given the large number and wide variety of ICOs — 43 in 2016, 210 in 2017, and 297 so far in 2018 by one account.

After all, some of these “coins” actually look and function a lot like currencies, which one key federal statute specifically excludes from the definition of security and another is silent about.

The SEC even implied in its DAO Report that there may be room for a virtual currency that is not a security — referring to Ether as a “virtual currency” and DAO tokens as “securities” but not vice versa.

Also, the fact that the Treasury’s Financial Crimes Enforcement Network issued a decision nearly simultaneously with the DAO Report imposing penalties on a cryptocurrency exchange caused one observer to note the “consistency of terminology, and near-simultaneous release of the FinCEN decision alongside the SEC’s DAO guidance, suggest that these listed cryptocurrencies may also qualify as virtual currencies, not securities.”

But the SEC has never explicitly identified a particular virtual token as not being a security.

On the one hand, this is completely understandable given the stakes and the evolving nature of the ICO marketplace. On the other hand, it’s odd.

The SEC — or at least its Division of Corporation Finance — has a long history of issuing “no action” letters related to certain types of investment arrangements that are not securities. In 2017, for example, Corp Fin informed loyal fans of the Rams football team that their fan club memberships could be sold and resold without registration or exemption as a result of not being securities. There is nothing preventing Corp Fin from issuing a similar “no action” letter regarding an ICO — if it were asked to do so by an appropriate ICO issuer.

Maybe the absence of a Corp Fin “no action” letter means that every ICO token is in fact a security. Or maybe the right ICO issuer has not yet presented itself to Corp Fin. Or maybe the SEC as an institution is reluctant to declare any token beyond its jurisdiction. Whatever the cause, a court may end up beating the SEC to the punch.

There are numerous cases around the country involving allegations of federal securities law violations by ICO issuers: criminal, SEC and private. The defendants in many of those cases have or will challenge the threshold issue of whether their particular tokens are securities.

One of those cases may join the long list of adjudications from past decades in which courts have found certain types of investments were not securities. If (or when) that happens, we will finally know what an ICO token that is not a security looks like.


Nicolas Morgan is a partner at the global defense firm Paul Hastings. He focuses his practice on complex securities litigation in state and federal courts and representations involving government investigations and white-collar crime allegations levied against individuals and businesses. He routinely represents securities issuers, company officers and directors, investment funds, analysts and brokers in connection with SEC and FINRA investigations, litigation and arbitration.

He also counsels public companies, funds and broker-dealers on securities compliance and corporate governance, conducts internal investigations and assists in regulatory examinations initiated by the SEC’s Division of Corporate Finance and Office of Compliance Inspections and Examinations.