On November 30, 2017, I had the great pleasure of participating in a panel discussion with representatives from the U.S. Securities & Exchange Commission at an event sponsored by Blockchain at Berkeley (https://blockchain.berkeley.edu/). This was the first time that the SEC has ever agreed to participate in a public cryptocurrency event so I thought it was important to share a quick rundown of some of my takeaways from the discussion:
The SEC recognizes that an ICO can provide a fair and lawful way to invest.
Given all the fear and uncertainty surrounding how the SEC eventually intends to address the ICO funding model, it was refreshing to know that they acknowledge the fact that ICOs can be a completely legitimate (and useful) means of raising capital for legitimate blockchain-based projects.
There is no sure-fire way to determine whether a token will be deemed a security
Consistent with the opinion of most analysts on the subject (including my own), the representatives from the SEC who participated on the panel confirmed that there is no simple bright line rule that can be followed to determine whether a token is a security for purposes of U.S. securities laws and regulations. Instead, each token will be reviewed on a case-by-case basis following the Howey Test and other applicable rules and guidelines (see my article on the subject here)
The SEC provided some general guidance to help with the security analysis
Although repeating the fact that every token will be analyzed on a case-by-case basis, the SEC representatives did share some general pointers on what they would be looking for, including:
1. Transparency – Do investors have access to all of the relevant information about the token and the project?
2. Disclosure – Related to transparency, is the ICO actively communicating all relevant and important information about the token and the project to prospective investors?
3. Communication – Has the ICO actively reached out to the SEC for guidance on their ICO and any related projects?
4. Registration – Has the ICO registered its trading platform with the SEC?
5. Segregation – Are the assets of the customers kept separate from the company accounts?
6. Investor Sophistication – Is the ICO only raising funds from accredited/sophisticated investors or the public at large?
7. Marketing – Is the ICO privately communicating with accredited/sophisticated investors to raise funds or is it marketing the ICO to the public at large?
8. Record-keeping – Is the ICO keeping detailed and easily auditable records of the funds being raised as well as information about the investors?
As previously stated, none of these points are definitive but are meant to highlight some of the criteria the SEC uses when attempting to determine whether something qualifies as a security for regulatory purposes.
Substance Over Form
Related to the Howey Test mentioned above, the SEC will thoroughly review tokens and ICOs brought to their attention and consider the substance of a token’s actual utility as opposed to simply what it’s called. Once again, transparency and disclosure are two of the critical components to helping an ICO “stay out of trouble.”
Crackdown on Scams and Fraudulent ICOs
The SEC recognizes the unfortunate trend of significant fraudulent activity and potential for scam artists to hijack the ICO and blockchain space and will actively pursue these bad actors as part of their overall mission.
Although there weren’t necessarily any groundbreaking pronouncements made by the SEC at the Blockchain at Berkeley event, the information presented was very useful and reinforced what many of us in the ICO advisory field have been saying all along: When planning your ICO you ignore the SEC at your own risk.
Don’t try to mask a utility-less token for what is not
You think “they” will not figure it out; when the mouse is away, the cat the play. So you packed your white paper with a list of utility purposes the token will have. Or better, you spread out and disseminate different the utility value across your white paper, marketing docs, website, etc. Let me be clear with you: “they” will find out. Always act as if everyone will know about your doing, and when that happens, it’ll not be pretty. Crypto is a small community still, and what you don’t want is your name and reputation crushed under the weight of a lawsuit or worse yet, a government-led enforcement action. If the token does not have real utility, first thing first is to just acknowledge it. Then decide whether you want to pivot to a model where there’s some real and exclusive utility, or just use some of the avenues that are Government compliant (e.g. Reg. A+, Reg. D, Reg. S). Check out my previous article on the subject here.
I leave you with a simple but effective principle that will help you navigate the ICO regulatory grayish area, and Crypto in general: if it doesn’t feel good, it probably isn’t.
Christian is a big believer in the power of decentralization, and the remarkable impact it can have on our lives. He’s a consultant, advisor, investor, connector, writer and speaker in Blockchain, ICOs and Cryptocurrencies. Fortunate enough to have lived the transition, he brings two decades of traditional business experience coupled with the new decentralized frontier.
All content created in this article does not represent advice nor is considered an official representation of the law or of the governing authorities. Use it at your own discretion.