Getting Real about the SEC: What Actually Happened and What it Means for ICOs

Olivia Lakely
Aug 9, 2017 · 6 min read

On July 25, 2017 the U.S. Securities and Exchange Commission (SEC) released their first public statements regarding Initial Coin Offerings (ICOs) (note: this was not their first public statement regarding cryptocurrency in general, an Investor Alert on bitcoin and other virtual currencies was published in May 2014).

Since then there’s been a flurry of responses on the internet from a variety of perspectives — professionals and enthusiasts from the legal, financial, blockchain, cryptocurrency, and ICO worlds have all weighed in on the meaning and impact of these statements.

But, as happens, a lot of what is going around on social media regarding the SEC and ICOs is either confusing, misconstrued or, in some cases, straight up misinformation.

So, we decided to clear some things up. In this post we’ll clarify some FAQs around this situation, including:

what the SEC actually said

what it means for those involved in ICOs

TL;DR:

-The SEC’s July 25th, 2017 statements, as well as their existing laws and regulations, only apply to ICOs whose tokens are considered securities under U.S. law AND who want to sell these tokens to U.S. citizens (aka NOT all ICOs).

-Just because a legal body (like the SEC) has not made an official statement on ICOs or digital/virtual/crypto currency, and/or blockchain does not mean the laws do not exist.

-Project creators should get legal counsel on their ICO before it opens

What did the SEC actually say?

On July 25th the SEC released a couple of texts:

  1. An investor bulletin about ICOs. The bulletin is effectively an informational warning to U.S. citizens who might be considering giving money (of any kind) to any ICO. Nothing more. It is definitively not a law, a ruling, a ban, or the announcement of any kind of overarching decision.

What the SEC stated in their report:

a. DOA Tokens are in fact securities under U.S. law, meaning

b. These tokens are subject to U.S. federal securities laws, but

c. In this case, the SEC is choosing to not pursue enforcement, so is not formally saying if any laws were actually violated,

d. So there will be no punishments, fines, etc. against The DAO. At least for now!

To hear a little from the horse’s mouth, here’s an excerpt from the SEC investor bulletin:

The Commission applied existing U.S. federal securities laws to this new paradigm, determining that DAO Tokens were securities. The Commission stressed that those who offer and sell securities in the U.S. are required to comply with federal securities laws, regardless of whether those securities are purchased with virtual currencies or distributed with blockchain technology.

To summarize, the DAO is just an example case, and the SEC is just reminding people that their laws and regulations apply even to blockchain-based businesses and transactions.

Who does it affect?

One more time, the SEC is a U.S. agency, so anything the SEC does or says is about U.S. citizens. SEC regulations apply to you if you are either:

  1. A U.S. citizen buying a security

What does it mean for ICO creators?

It means if you want to run an ICO that U.S. citizens can participate in, you should figure out if your token is considered a security in the U.S.

Again, the DAO Token is just one specific example of a token that has been officially determined to be a security under U.S. law. This does not mean all digital tokens are now automatically securities under U.S. law. The SEC intends to approach each ICO individually.

However, you clearly should not wait for the SEC to come to you. As an ICO creator you need to either:

  1. Design you token to so that it is not a security

Either way, it makes a lot of sense to first seek legal advice on the question before you begin your ICO. Remember, it’s not about what you call your token, or what clever wording you think up to describe it, the bottom line is if it functions like a security, then it is a security.

Has anything changed?

No. This is maybe the most important point. The SEC has not introduced any new regulations or laws. Just because they hadn’t yet made a public statement about ICOs and digital tokens does not mean that they didn’t have applicable laws in place. They did.

So, the eternal question is of course: how do you know if what you’re selling is in fact a security?

How do I know if my tokens are securities?

Hopefully you’re asking yourself this question before your ICO has started selling tokens to U.S. citizens. But probably better late than never!

To determine if something is a security in the U.S. you can use a handy test called the Howey Test, created by the U.S. Supreme Court. It states that a transaction is an investment contract (and therefore considered a security) if the transaction is:

an investment of money due to

an expectation of profits arising from a

common enterprise which

depends solely on the efforts of a promoter or third party.

Ok, so there’s some legal jargon there, and who knows what a ‘common enterprise’ is. But, for ICO creators, this test is saying if the (U.S.) person buying your token expects to make a profit because of your efforts, then your token is a security.

Bottom line, again, if you have any doubts at all about the status of your tokens, it is best to get specialized legal counsel to review your token and give their expert opinion on whether or not you pass the test. We know, a lot of new projects are on tight budgets, and lawyers aren’t free. But they’re probably cheaper than fines and penalties you could pay to the SEC if you accidently don’t follow their rules.

Big Picture

Sure, some people may see the SEC’s public statements as some kind of downfall for ICOs and the blockchain industry in general. But the truth is, as we said above, the SEC’s laws and regulations already existed. And of course similar laws exist in lots of countries, not just in the U.S. This is not a downfall or a loss for the industry. If anything, it’s a fairly gentle reality check.

The potential and momentum for new innovative projects built on blockchain technology is still very much alive and kicking. ICOs are one example — a way to fund a project’s development that directly connects users and developers. In a way, the current hubbub around regulation is sort of a side story, distracting us from the essence of the matter: ICO as a new funding model is and can be totally legal, while remaining innovative and disruptive, even in the U.S.

What we’re doing at ICObazaar

As an ICO participation platform, we continue to uphold our position that ICOs should always be as transparent as possible with potential supporters about their projects, how their tokens work, and how they will use the funds they raise.

Our platform is designed to make contributing to any ICO as easy as possible for all users around the globe. But of course laws regulating transactions exist in lots of countries, not just the U.S., and we encourage users to comply with their relevant local laws. When you register on our site, you confirm that you are responsible for your decisions in terms of how to use our platform.

Given that we host lots of ICOs with differently designed tokens, we do not think it is right or fair to close our platform to certain users from certain countries. Nor do we act as regulators for new ICOs. Rather, we bring together new projects and potential supporters and expect them to comply with the laws of their respective countries. As always, we encourage potential supporters to learn as much as possible about any project they’re interested in, and to determine whether or not they want support them.

Disclaimer: this article is not intended to be nor does it constitute legal advice!

Join the ICObazaar community

Stay on top of what’s happening on our platform and in the ICO industry in general by subscribing to our blog right here, and following us on Twitter, Facebook, and Telegram. You can also communicate with us and other members of our community directly on Bitcointalk, Reddit and Steemit.

You can also always contact us at hello@icobazaar.com for general inquiries, or support@icobazaar.com for support issues.

ICObazaar

Welcome to the official ICObazaar blog. Here you'll find info from the world of crypto crowdsales (ICOs) and updates about our platform. ICObazaar is a platform for ICO ratings, reviews, and crypto market analysis.

Olivia Lakely

Written by

marketing & content creation at ICObazaar.

ICObazaar

ICObazaar

Welcome to the official ICObazaar blog. Here you'll find info from the world of crypto crowdsales (ICOs) and updates about our platform. ICObazaar is a platform for ICO ratings, reviews, and crypto market analysis.

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