The SEC ICO & DAO press release, explained in simple English
Today is the launch of my new legaltech/fintech company Bootstrap Legal (which automates real estate fundraising documents), but halfway through the day, my Facebook Messenger started blowing up with people asking me what today’s SEC press release means in layman’s language. So, this is my 15 minute break from a scurry of activity to break it down for ya’ll. If you want to know whether securities laws apply to your particular ICO, knock yourself out with my other article from months back.
TL;DR: If you’re taking money from U.S. investors via an ICO, U.S. securities laws may (but does not always) apply.
Headline: We are the SEC and we are now providing guidance for ya’ll that the DAO specifically was a security, and is thus regulated by SEC law.
Paragraph 1: For those of you out there doing ICOs, we’re here to warn you that U.S. securities laws might apply. When we say might, we mean just that — sometimes securities law will apply, sometimes it won’t. It depends on the specific facts of the ICO.
Paragraph 2: We looking into The DAO and are now concluding that federal securities laws applied in that case. If you’re looking to do something like the DAO, and ICO, etc., you need to follow securities laws. For all the platforms out there allowing the trading of tokens where securities laws applies, heads up — you’re regulated too. We regulate this stuff to protect investors and make sure that you’re transparent.
Paragraph 3: Quote from Chairman Jay Clayton, saying that the SEC is still studying what effect ICOs will have on the capital markets. Because we also want to foster innovative and beneficial ways to raise capital as well.
Paragraph 4: Quote from William Hinman, saying that ICOs need to disclose all the risks of investment so that invests can make informed decisions.
Paragraph 5: We the SEC looked into this whole DAO, ICO, blockchain business. The DAO folks tried to pass off what they were doing as a “crowdfunding contract” but it still broke securities laws and regulations. (By the way, there is such a thing as investment crowdfunding, which allows more than just rich people to invest, so that’s no excuse).
Paragraph 6: Just because you cloaked this fundraising mechanism in technology doesn’t mean the securities laws don’t apply.
Paragraph 7: As tech evolves, you all have to remember the application of existing regulations.
Paragraph 8: We’re not going to punish anyone in this instance (The DAO), or formally say The DAO violated any laws, but we’re sending a signal to the industry to be aware that securities laws exist. It doesn’t matter that you’re a decentralized autonomous company instead of a normal one; that you’re using cryptocurrency instead of straight up U.S. dollars; or that you use blockchain instead of paper stock certificates.
Paragraph 9: We made this cool investor bulletin to educate ICO investors. In it, we say that securities laws might apply to tokens or virtual coins. Those laws require that you disclose stuff and comply with investor protection laws. It also reminds investors to beware of fraud.
Paragraph 10: Credits the investigation to certain individual and groups.
There you go. Chill out, ya’ll. Nothing has changed — the laws that always applied still apply. The SEC is just making you very, very aware.
Just so you know, it doesn’t matter if you’re using blockchain or ether or bitcoin or whatever — the SEC doesn’t care about any of that. What it does care about is balancing investor protection and capital formation.
Please don’t hit me up asking if your situation is a security (I already get way too many messages and can’t keep up). Instead, read this. If it sounds like it might be a security, go talk to a securities attorney about your regulatory options (preferably one who actually knows what blockchain is and is familiar with the new crowdfunding rules). If it sounds like its not, well, you should double check anyway.
I keep getting questions for an example of one that’s probably not a security. Here is an example. See the difference? They’re not raising capital for their company or giving away equity. They’re just pre-selling coupons (more like kickstarter, less like raising from investors). (Full disclosure: I may become an advisor to that ICO. Don’t put money in it just because I mentioned it.)