ICOs: Tick. Tock. Boom?

“Looking back at enforcement actions, a common theme emerges — where opacity exists, bad behavior tends to follow.”

- Chairman Jay Clayton, SEC (scripted remarks)

“We can stay here and get the shit kicked out of us, or we can fight our way back. Into the light. We can climb out of hell.”

- Coach D’Amato (Al Pacino), Any Given Sunday


In case you missed it amidst the Bitcoin Cash drama, and $150mm Parity hack (slow news week!), SEC Chairman Jay Clayton issued his sternest warning yet last week regarding ICOs (his term) and token sales (our term). His scripted and unscripted remarks took aim at the underbelly of the token economy, and didn’t leave much to the imagination:

“I have yet to see an ICO that doesn’t have a sufficient number of hallmarks of a security.”


I’ve been banging this drum for months (as have many others). If you explicitly sell tokens, or pre-token securities like the SAFT, to professional speculators (VCs), and those speculators can then resell those investments months later to non-accredited purchasers at a significant mark-up…you’re gonna have a bad time.

Not because your legal arguments aren’t clever, but because you’ve failed the eyeball test. You simply can’t have steep pre-sale discounts for VCs, <90 day liquidity, and retail secondary purchasers.

Let’s call it the Token Idiot’s triangle. Fast liquidity, “advisor” discounts, retail purchasers. Pick two of three.

Or increase the amount you are budgeting for your legal defense.

Among the other gems in Clayton’s scripted remarks were the following:

“As Joseph Pulitzer said: ‘There is not a crime, there is not a dodge, there is not a trick, there is not a swindle, there is not a vice which does not live by secrecy.’”


“The SEC may not yet have policy or rulemaking answers in [this] area, but we are on the lookout for ways to fight the type of opacity that can create an environment conducive to misconduct.”


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 [ICO] platforms is susceptible to price manipulation and other fraudulent trading practices.”


Reading Clayton’s remarks as an ICO supporter

Seriously, read Clayton’s comments, and look at the heat that the industry is starting to attract here and here and here and here.

It’s obvious we’re at a crossroads.

We can mobilize, self-regulate, and align around some common sense disclosures and token sale best practices, or we can get the shit kicked out of us, and watch (much more repressive) regulation come from on high.

It’s almost as if people forget that the reviled BitLicense was at least partially a political reaction to the collapse of Mt. Gox.

Do we think ignoring explicit warnings from a much more powerful regulator — one with global reach — is going to end better or worse for the industry?

Absent broad coordination from the industry’s top investors, advisors, laywers, and exchanges, the coming ICO correction and regulatory crackdown will make the bitcoin dark ages of early 2014 to mid-2016 look quaint by comparison.

The good news is that Clayton gave us an opening!

In a section titled “Deterring, Mitigating, and Eliminating Misconduct through Transparency and other Measures”, he explains:

“Enforcement is an essential component of the Commission’s work…[but] as we carry out the Commission’s mission, a question we should be continuously asking is: are there opportunities to deter, mitigate, or eliminate wrongdoing before an enforcement action becomes necessary?”


“The Commission will continue to seek clarity for investors on how tokens are listed on these exchanges and the standards for listing; how tokens are valued; and what protections are in place for market integrity and investor protection.”

The SEC has essentially written an RFP for an open-source EDGAR database for cryptoassets, something I wrote about less than three weeks ago.

We won’t get to globally recognized token reporting standards overnight, or maybe ever. But we can — today — collect basic information on all of the major tradable tokens: which incorporated entities issued them, and what are their verified web addresses, social media accounts and token sale wallets. And in a market driven by sentiment and supply, what are fully diluted supply curves.

Non-controversial, objective, quantitative, accessible, and material data points like these can serve as the backbone for conversations regarding best practices and self-regulation in the token economy.

We’ve been blown away by the near-universal philosophical alignment and verbal interest that has been expressed in collaborating on the Messari database by the industry’s major stakeholders. And projects like Aragon, 0x, Filecoin, Blockstack, and many others have begun to set the standard in how new token projects should detail information regarding their issuances.

But verbal support and ad hoc project reporting will be insufficient to satisfy the regulators who are keeping a watchful eye on token sales. We need to organize, quickly. And get formal support for some self-regulatory starting point, quickly.

Along with several other transparency initiatives, Messari has drafted and circulated a one-page token disclosure document to a number of industry stakeholders, from whom we hope to generate broad, formal support. Our goal is to get non-binding LOIs from dozens of industry leaders by the end of the year, and rally behind an open, proactive reporting framework.

(We’ll make our disclosure document available for public comment in early December. Get in touch to help!)

We think we can ward off bad, cumbersome regulation by taking Chairman Clayton and his colleagues at their word.

The ICO status quo is broken. Let’s see if we can “deter, mitigate, and eliminate misconduct through transparency.”