ICO Something else to think about
SEC Chief Fires Warning Shot Against Coin Offerings; Clayton says ICOs in many cases look like securities, suggesting companies may need to register the deals with the SEC
Thursday, November 09, 2017, 5:31 PM ET
By Dave Michaels and Paul Vigna
SEC Chairman Jay Clayton said so-called initial coin offerings in many cases looked like securities, raising the prospect the agency will take a more aggressive stance to this red-hot fundraising method."I have yet to see an ICO that doesn't have a sufficient number of hallmarks of a security," Mr. Clayton said in an unscripted remark delivered in the middle of a speech at the Institute on Securities Regulation in New York Wednesday .Mr. Clayton's remarks suggest firms using the coin offerings, also known as ICOs, to raise cash in the U.S. may need to register the deals with the SEC and provide investors with extensive disclosure documents, depending on how broadly they market them. Startups that once conducted virtually unregulated token sales will likely have to consult lawyers and other gatekeepers to advise them on how to navigate laws and rules overseen by the SEC.An initial coin offering is a method of capital raising among cryptocurrency-related startups that has exploded in popularity this year. In an ICO, firms simply create and offer a new token to investors. The process can be as simple as adding a few lines of code to an existing project.There have been more than 160 of these ICOs this year, which have collectively raised more than $3 billion, according to data from research firm Coindesk. Before this year, ICOs had raised a total of about $300 million going back to 2014.But as the dollar totals have risen, the questions among regulators have risen as well. Chinese authorities in September declared coin offerings illegal. Hong Kong regulators warned the offerings are likely to be regulated. The U.K.'s Financial Conduct Authoritysaid token offerings have parallels with initial public offerings and other fundraising methods, and may fall into its "regulatory perimeter."In July, the SEC issued a high-profile investigative report on coin offerings, concluding that some of them may meet the definition of a security, but that it would look at each on an individual basis. The focus of the report was a 2016 offering called The DAO. The commission concluded the DAO tokens were a security, but it declined to take enforcement action against the sponsors, opting instead to provide guidance on how ICO users should deal with investor protections written into securities laws.In the wake of that report, a number of firms tried to calibrate their offerings to a form they assumed would keep them clear of the securities designation. Mr. Clayton's comments suggest they could still be within the SEC's ambit if they raise funds within the U.S.Mr. Clayton's comments came while he was discussing transparency and ways to deter wrongdoing. "Where opacity exists, bad behavior tends to follow," he said, touching on such topics as mutual-fund fee disclosures, penny stocks, investor education, and coin offerings."There is also a distinct lack of information about many online platforms that list and trade virtual coins or tokens offered and sold in initial coin offerings," he said, warning that many platforms were susceptible to manipulation and other fraudulent practices by ICO insiders, management, and better-informed traders.In a brief interview after his speech, Mr. Clayton said many ICOs resemble traditional stock offerings, with the only difference being the new fundraising tool involves tokens and distributed-ledger technology. "When you depart from the bitcoin or the ethereum, and you get into the tokens, the hallmarks become pretty clear," he said.