American cryptocurrency investors who complained about how many ICOs (Initial Coin Offerings) exclude them from participating are going to be really disappointed from now on. The US Securities and Exchange Commission (SEC) has concluded that token sales are subject to the requirements of federal securities laws – thus asserting its jurisdiction over the field.
The SEC says that whether or not an investment transaction involves the offer of a security is not dependent on the terminology or technology used.
Those participating in unregistered offerings also may be liable for violations of the securities laws. Additionally, securities exchanges providing for trading in these securities must register unless they are exempt.
“The SEC is studying the effects of distributed ledger and other innovative technologies and encourages market participants to engage with us,” said SEC Chairman Jay Clayton. “We seek to foster innovative and beneficial ways to raise capital, while ensuring – first and foremost – that investors and our markets are protected.”
“Investors need the essential facts behind any investment opportunity so they can make fully informed decisions, and today’s Report confirms that sponsors of offerings conducted through the use of distributed ledger or blockchain technology must comply with the securities laws,” said William Hinman, Director of the Division of Corporation Finance.
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This is the result of an investigation by the SEC’s Enforcement Division into The DAO that determined that its tokens were securities and therefore subject to federal securities laws.
The SEC says that while The DAO has been described as a “crowdfunding contract”, it would not have met the requirements of the Regulation Crowdfunding exemption because, among other things, it was not a broker-dealer or a funding portal registered with the SEC and the Financial Industry Regulatory Authority.
“The innovative technology behind these virtual transactions does not exempt securities offerings and trading platforms from the regulatory framework designed to protect investors and the integrity of the markets,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.
Steven Peikin, Co-Director of the Enforcement Division, added: “As the evolution of technology continues to influence how businesses operate and raise capital, market participants must remain cognizant of the application of the federal securities laws.”
Luckily for the people behind The DAO, the US agency has decided not to bring charges in this instance, or make findings of violations in light of the facts and circumstances.
The SEC is instead taking this opportunity to caution the industry and market participants: federal securities laws apply to those who offer and sell securities in the United States, regardless of whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless of whether those securities are purchased using U.S. dollars or cryptocurrencies, and regardless of whether they are distributed in certificated form or through distributed ledger technology.
This is the most important warning so far from regulators to ICO issuers, providers and investors, but it is not the first. The Israeli regulator has asked to “extend a greater degree of paternalism” with regard to ICOs and EU lawmakers are working on a legal framework for the practice. Needless to say, all of this can have overarching effects on Ethereum, most ICOs’ cryptocurrency of choice.