In his opening remarks to the Securities Regulation Institute at a January 22, 2018 event, the SEC Chairman, Jay Clayton, reiterated what many advisers and founders associated with cryptocurrency projects and Initial Coin Offerings (ICOs) had feared — the SEC will be taking at closer look at at their involvement in the industry.
The SEC Direction
Of particular concern to the SEC are ICOs where lawyers and other advisers are involved to, on one hand, assist promoters in structuring offerings of tokens that (at least on the face of it) have many of the key features of a traditional Initial Public Offering (IPO) securities offering — but are instead called an ICO. On the other hand, those advisers and promoters claim the tokens are not securities, and the promoters proceed without compliance with securities laws in the US or elsewhere. The SEC expressed its concern that this may potentially deprive investors of the substantive and procedural investor protection requirements of securities laws.
Further, the SEC called out situations where advisers have taken a step back from the key issues — including whether a token or coin is a security and whether the offering qualifies for an exemption from registration under securities law. The SEC is concerned that in these instances, advisers have provided advice and guidance that is overly equivocal (i.e. “it depends…”), rather than properly counselling promoters that the token/coin/product they are promoting may be a security.
The Key Messages
For advisers, the key take-away is clearly that the SEC will be monitoring advice given to cryptocurrency projects. Indeed, SEC staff have been instructed to be on high alert for approaches to ICOs that may be contrary to the spirit of securities laws (at least in the US).
For projects and ICO promoters, the “wild-west” days of 2016/7 and earlier are over. The SEC is increasingly stepping up enforcement action against promoters that violate securities law (see here and here).
These activities are also being combined with significant efforts by the SEC to educate the public on the cryptocurrency/ICO ecosystem and push the message that unregistered securities investments offered by unregistered promoters, with no securities lawyers, accountants or advisers involved, are, to quote the SEC Chairman, “dangerous”.
The Lesson for ICOs
Now more than ever it is critical that projects considering an ICO have a firm handle on the commercial, technological and regulatory factors that will influence the success of an ICO. Without a comprehensive framework to evaluate and manage a broad spread of risks, crypto-projects and founders risk running into commercial and regulatory difficulties that may prove fatal to a project.
In the competitive 2018 ICO market, sophisticated investors are increasingly expecting founders to have a settled position on many commercial and regulatory aspects of the project, such as the “securities” question and ICO offering structure.
In our experience, by engaging advisers early to provide holistic and thorough advice, projects are able to achieve a better ICO outcome, without many of the headaches that often plague and delay ICOs.
Lupercal Capital and its team of cryptocurrency experts have provided strategic consulting on blockchain technology and ICOs to startups and existing businesses to help them unlock the potential of distributed technology.
If you’re interested in regulatory developments in cryptocurrency, check out CryptoRDB, the most comprehensive database on cryptocurrency regulation.