SEC Clamping Down on ICOs is Not Necessarily a Bad Thing

The Securities and Exchange Commission (SEC), the federal agency in-charge of regulating the securities industry in the United States, has been grabbing headlines for its clampdown on numerous Initial Coin Offerings (ICOs) this year.

Right after pulling the rug under decentralised exchange EtherDelta for operating an unregistered ‘securities exchange’, the SEC slapped a heavy USD $250,000 penalty on two ICOs — Airfox and Paragon — and mandated that they return funds raised during their token sales. These ICOs were deemed as securities violations as these were not registered under the federal securities laws nor did they qualify for an exemption. Both the businesses have agreed to pay the penalties, return funds to investors, register their tokens as securities and file periodic reports with the Commission.

More recently, the SEC issued a cease and desist order to crypto investment fund CoinAlpha and handed them a USD $50,000 fine. In light of this stringent regulatory action and heavy penalties, many token issuers, financial institutions and retail investors have become increasingly worried about the future of the ICO industry in the US.

SEC Thinks Most Tokens are Securities

With these crackdowns, the SEC message is loud and clear. The regulator thinks that most of the tokens issued under ICOs are securities and it is only going to tighten the noose further until the token issuers comply with the regulations. In fact, SEC is even going after celebrities and influencers who have been promoting ICOs, or in their view, unregistered securities. The SEC charged Floyd Mayweather and DJ Khaled for promoting ICOs without disclosing the promotional payments offered to them.

The SEC seems to have put the onus on token issuers to consider their ICOs as securities or prove otherwise. The actions on Airfox and Paragon indicate their general line of thought, and the regulatory body is setting a general, unwritten standard for the industry to follow. The SEC Chairman Jay Clayton had also said that if companies wish to raise money through ICOs can do so with private placement or register with the SEC.

However, many observers feel that SEC should issue some sort of guidance to many of the long pressing questions in front of ICO issuers. While enforcement is one aspect, experts want the SEC to come up with a formal regulatory framework for crypto assets. In our previous post, we highlighted the fact that ambiguous regulatory guidelines make it very difficult for new businesses to raise capital through token sales.

Currently, the regulators are applying archaic financial regulations to the token industry. For instance, the Howey Test is commonly applied to the crypto market to understand whether the tokens should be classified as securities or not. The SEC, on their part, have said that they will release ‘Plain English’ guidance for token issuers soon. Till that happens, it is fair to say that there will be more questions than answers for businesses working in this space.

Keep Calm and Conduct an ICO

“ICOs continue to be an effective way to raise capital” — Guess, who said this? SEC Chairman Jay Clayton himself! This should serve as good side note to naysayers who are busy writing ICO obituaries. For businesses considering ICOs, the statement proves that regulators are not coming with a one-point agenda to destroy this innovative financial instrument. All they are saying is — If you are going to be in the jungle, then there are rules to be followed.

And that’s the beauty of blockchain technology powering these tokens. The innovative technology behind these tokens allows businesses to program token structures and functions in flexible ways, hitherto not possible with traditional capital raising instruments.

Token issuers can approach this in multiple ways to be on the right side of regulation. For instance, they have the option of issuing utility tokens which give users access to certain features within a network in ways which simply do not imply ownership interest or expectation of profits. Or they could go with Security Token Offerings (STO), a model which is increasingly finding a lot of takers. Other approaches could be explored as well.

The bottom-line: SEC wants businesses to raise capital in this market only through regulated token offerings.

SEC Action Weeding Out Bad Actors

The SEC is also doing another great service for the cryptocurrency space — eliminating bad actors! 2017 was the wild wild west of the crypto market where freewheelers could come in and make millions based on just a whitepaper. The SEC (and of course the bear market) has effectively put an end to the practice as it is extremely difficult to raise money for scam projects like last year. The regulatory action has ensured that only those companies with a serious commitment towards their vision, transparent and clear token economics, detailed roadmap and a good team are entering the token sale process. We can testify to this trend as we are seeing quality ICO projects coming to us, despite the bearish market sentiment.

If you examine closely, the reactions to the SEC clampdown tend to be far more exaggerated than the actual enforcement. The ongoing bear market has simply magnified the perceived impact of this regulatory action. Had the same actions been taken during a bull market, the story may have been a little different.

In the long run, actions by SEC and other pro-crypto regulators across the globe will be important to establish a clear framework for this asset class, which in turn, will allow the nascent industry to prosper. Real world adoption can come only when people can utilise the technology without fear or worry and regulation is an important step towards achieving that.

About ICOMain.io:

ICOMain.io is a full-service solutions provider for all the things needed to complete a successful ICO. Our comprehensive solutions are designed for companies looking to tap into the immense potential of blockchain and launch their ICO in the most efficient manner possible. Our team comprises of seasoned experts who have a wealth of experience in advising ICOs and is complemented by our cutting-edge technology infrastructure. We are dedicated to understanding their clients’ needs who may come from a diverse range of industries. We are also the first sponsor firm for the Gibraltar Blockchain Exchange (GBX) that aims to be a world-leading, institutional-grade token sale platform and cryptocurrency exchange.

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