SEC Cracks Down on ICOs
Coindesk reported that the Securities and Exchange Commission (SEC) finally confirmed that it is investigating companies that are associated in any way to ICOs (Initial Coin Offerings). The whole issue of ICOs, cryptocurrencies and blockchain tech is now coming to a head.
How it all started
The whole issue of goes back May of 2017, when the SEC was petitioned to develop rules to deal with blockchain related assets. The SEC was asked to step in and resolve the issue of the regulation of cryptocurrencies and blockchain technology.
This was when the issue of classifying cryptocurrency tokens as securities was made official. This classification meant crypto tokens should therefore be subject to the same regulations that controlled regular securities.
Then, in July of 2017, the SEC, while investigating the DAO collapse, stated that cryptocurrency tokens were unregistered securities. The SEC also stated that it wasn’t going to level any charges on tokens related to the project. It was, however, going to issue a public warning about the risks of fraud when dealing with unregistered securities.
The SEC basically put all ICOs on notice about adhering to Federal Securities Laws.
The Situation Today
Despite the SEC giving fair warning that it was going to crack down on ICOs raising capital without keeping Federal Securities laws in mind, startups have mushroomed across the country, raising funds through ICOs offerings. Which has led the SEC to initiate investigations against dozens of such startups.
Gary Genseler, former CFTC chairman and MIT professor, believes that the SEC will now crackdown on crypto exchanges too, since they have listed tokens that could be classified as securities.
Challenges for New Token Issuers
It is not just existing exchanges that will face issues.
New tokens being created and issued will be termed Utility Tokens. Utility tokens will be defined as digital assets that are meant to represent a share of the blockchain protocol.
The problem here is that the government’s definition of what constitutes a utility token versus a securities token is so small that it creates more confusion than clarity.
Companies in the US that are planning to issue crypto tokens as securities will probably still struggle to reach buyers and investors, because, so far, there are is no registered broker that is capable of trading securities tokens in the country.
Thanks to the lack of clarity in regulations right now, many ICOs are simply abandoning retail investors. Another route that many ICOs are taking is called “geo-filtering”. Issuers who don’t want to get embroiled in the SEC crackdown of ICOs are simply filtering out the US as a place to issue tokens.
A lot of companies are also moving to a Regulation D Exemption, however most of the issuers are still stuck with the SEC’s 12-month lock down requirement. Additionally, the rule requires buyers to be accredited investors.
There are, however, a lot of other token issuers that have simply built in these regulations into their models and are offering registered tokens that are compliant with SEC regulations for normal securities.