SEC Cracking Down ICOs

Tim Hsu, Asset Management Director Blockchain Technology


In the past few months, the U.S. SEC has significantly expanded its crackdown on hundreds of projects, putting these startups at risk. Recently, the SEC has subpoenaed several startups that failed to sell tokens exclusively to accredited investors.

In response to the subpoenas, dozens of companies have agreed to refund investors and pay a fine. However, it seems that those who can simply walk away by paying up are the lucky ones as many others continue struggling to satisfy the rather unclear and inconsistent demands from the SEC.

Many ICOs were successfully launched in the past two years by structuring as a “utility token” or a SAFT (Simple Agreement for Future Tokens), despite SEC executives’ previous comments on how they think of most ICOS as securities. It is not until July this year when the SEC announced that the $150M ICO project DAO is a offering, other ICOs started to realise that the SEC is not messing around any more.

Why is being seen as a security offering such a big deal? Because it is required by law that any U.S. company offering a security must register with the SEC, which is a tedious process. The other lawful way to do it is to qualify for an exemption, such as selling only to foreign investors, or accredited investors with more than $200,000 income in each of the past two years or a minimum net worth of $1M. And you guessed it, virtually all ICOs went for the exemption path, by providing a set of checkboxes as a method to exclude unqualified investors. However, the SEC wants more than that by spelling out plainly: “reviewing documentation, such as W-2s, tax returns, bank and brokerage statements, credit reports and the like.”

From the SEC’s standpoint, lack of clarity does not exist, and that the decades old security laws can perfectly apply to ICOs.

“Everybody’s holding their breath for the SEC to create some kind of coin rule, and they’re not going to,” says a securities attorney at one high-profile Silicon Valley firm. “They’re applying the same laws, the same statutes, the same rules, to stocks and bonds and everything else.”

Sources are saying that a union led by Ripple is formed and D.C. lobbyists are hired to lobby Congress on the industry’s behalf. The outcome shall be very interesting.