Initial coin offerings (ICOs) are being heralded as Crowdfunding 2.0, but that could be understating the case. So far in 2017, 200 issuances have raised approximately $3 billion, which dwarfs the amount raised under all Titles of the Jobs Act (including the technically-minted crowdfunding under Title III) since that landmark legislation went into effect. It’s no surprise, then, that widespread lack of ICO compliance with securities laws is on the SEC’s radar. Per a recent joint statement by the SEC Division of Corporate Finance and Enforcement:
Sponsors involved in an exchange of something of value for an interest in a digital or other novel form for storing value should carefully consider whether they are creating an investment arrangement that constitutes a security.
Don’t be surprised if the answer is almost always “of course it does,” and in any event, expect the SEC and state securities regulators to assert its authority over much ICO activity.
As the market intensifies even in the wake of this impending scrutiny, my inbox and LinkedIn feed have been filling up with updates and eblasted articles on ICOs. Here are some of the more worthwhile resources I’ve come across in the last week:
Scott Andersen, an attorney with significant securities regulatory and prosecutorial experience, predicts a flood of SEC enforcement actions against coin issuers. He highlights three main regulatory grounds the SEC will rely on to protect investors. In particular, unregistered broker dealer involvement in these offerings will be a focus.
In Cryptocurrencies: There’s Nothing New Under the Sun, Securities attorney Mark Roderick reminds us that ICOs can involve fundamentally different things, and delineates the three kinds of digital coins or tokens:
- Tokens like Bitcoin that are intended to function as currencies
- Tokens that represent economic interests in businesses, g., securities
- Tokens that give the holder some kind of contract right in the business conducted by the issuer, g., a distributed storage network
He spends most of the post discussing the third kind of token, those that give some kind of contract right, which interestingly may or may not be securities.
For those looking for book-length resources, JP Parker posts his reading list on blockchain technology and cryptocurrencies in particular.