SEC Chair Blasts ICOs, Warns Some Tokens Resemble Securities

ICOs which provide investors with a stake in a given company may be subject to Uncle Sam’s far-reaching arm.

The Chairman of the SEC, Jay Clayton, is making some worrying remarks for crypto-enthusiasts while speaking at the Practicing Law Institute’s annual symposium. In prepared remarks, the recently appointed chair of the top securities regulator told the audience at the Annual Institute of Securities Regulation that some initial coin offerings represent increasing risks for investors.

Clayton outlined that due to lack of clear information about ICOs, investors are exposed to prospective risks. Clayton also outlined that some token sales represent securities and that companies who sell such instruments in the US must comply with existing securities laws.

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Potential for Price Manipulation

Not only did he voice concerns about token sales, but also about trading of the instruments post-listing. Clayton highlighted several worries that have long boggled the minds of many crypto-enthusiasts who passed on ICOs.

“Investors often do not appreciate that ICO insiders and management have access to immediate liquidity, as do larger investors, who may purchase tokens at favorable prices. Trading of tokens on these platforms is susceptible to price manipulation and other fraudulent trading practices,” Mr Clayton said.

Recent SEC Warning Highlight

He continued with a reference to the recent warning by the SEC on ICOs. Moreover, he also fired some warning shots at exchanges, saying: “Any person or entity engaging in the activities of an exchange must register as a national securities exchange or operate pursuant to an exemption from such registration.”

“In addition to requiring platforms that are engaging in the activities of an exchange to either register as national securities exchanges or seek an exemption from registration, the SEC will continue to seek clarity for investors,” Clayton continued.

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His main point is that exchanges need to provide clarity on how tokens are listed and what the standards are for listing and valuation. A reference to investor protections was also made, as he expressed worry about the market integrity of the ICO market.

Uncle Sam is Still Notoriously Slow

Despite what may sound like worrying remarks for crypto-enthusiasts, the comments are still far away from any action which the regulator might take to reign in ICOs. Elaborating on retail investor protection, Clayton outlined that he is worried about the level of protections that retail investors in regulated products have.

As he outlined that the SEC estimates that 66 percent of all Russel 1000 companies are owned by Main Street investors, he said that it is not clear if their interests are protected. The number jumps to a whopping 79 percent if the figure includes foreign ownership.

Back to crypto and ICOs, in the words of Clayton, the SEC is very slow to respond with new regulations when those are needed.

“For understandable reasons, the SEC’s near-term agenda has swelled over the years. The Commission has limited resources, and rulemaking is, by its very nature, time- and resource-intensive. As a result, if all, or substantially all, of the rulemakings listed on previous near-term agendas were to evolve through to adoption, the process would take years,” Clayton explained.

If we are to look at the statistics of SEC rule-implementation, over the past 10 years, the regulator has only completed a third of the rules that it listed on its near-term agenda.

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