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Payments & FinTech Lawyer

US Securities and Exchange Commission declares that initial coin offerings may be subject to securities regulation

The US Securities and Exchange Commission (‘SEC’) published on 25 July 2017 an Investor Bulletin on initial coin offerings (‘ICOs’), which advised that depending on the individual case, the virtual coins or tokens offered as part of ICOs may be securities and if so the ICO is thus subject to US federal securities laws.

ICOs, which have gained substantial popularity as a means of fundraising and which have attracted the attention of more traditional investors as well as the cryptocurrency community, involve the offering or sale of virtual tokens or coins by start-ups which are based on blockchain technology. The virtual tokens can then be used in connection with the startup’s product or service, or the investor could use a coin currency exchange to ‘cash out.’

“The SEC’s finding will force start-ups looking to raise capital to comply with securities laws in terms of disclosure and existing procedures: just like everyone else. This would include, for example, compliance with Regulation D, Regulation A, etc.,” said James P. Jalil, Partner at Thompson Hine LLP. “The major implication is the SEC is letting everyone know it is aware of ICOs, it is thinking about ICOs, and is prepared to enforce securities laws in connection with ICOs. No one can say now that ICOs are ‘unregulated.’”

The SEC’s clarification came following the publication on the same day of its Report on its investigation into The DAO, a form of venture capital fund which used a token sale to crowdfund. The DAO was the subject of an attack in June 2016 which utilised a vulnerability in The DAO’s code, in which a third of The DAO’s assets were stolen. The SEC investigation analysed whether the tokens offered and sold by The DAO were securities, and here the SEC applied traditional securities laws principles, finding that The DAO tokens were indeed securities. In its bulletin, the SEC notes in relation to this investigation that ‘those who offer and sell securities in the U.S. are required to comply with federal securities laws, regardless of whether those securities are purchased with virtual currencies or distributed with blockchain technology.’

“This is just the first step,” adds Jalil. “What the SEC is saying is ‘hey, don’t forget about us and the securities laws.’ Which is fine - but what I believe is really needed is a comprehensive regulatory scheme which specifically addresses ICOs, including the novel issues that arise from ICOs, such as the global nature of ICOs, the anonymity of wallets, etc. I am not sure that existing laws, regulations and principles are completely applicable to ICOs.”

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