ANALYSIS: ICOs Get The Call From the SEC

Sept. 19, 2017, 1:15 PM

The new director of the SEC’s Division of Corporation Finance, William Hinman, confirmed on Friday at the ABA Business Law Section Annual Meeting in Chicago that the SEC staff have been keeping an eye on companies conducting initial coin offerings (ICOs). In fact, while not naming names, he said that some of these issuers and wannabe issuers, like Protostarr and Benja, have gotten a call from the SEC, shall we say, “asking questions” about the structure of the offering, the exact nature of the “coin” and the related disclosure. All good questions, considering the current exuberance and shadiness of the ICO market on one hand, and the SEC’s mission to protect investors and keep the market fair and orderly on the other. Some of these questions must have been such good puzzlers that Protostarr decided to abandon the ICO plan and refund all money to its investors.

Issuers Say, “What Securities Laws?”

According to Director Hinman, the SEC has assembled a team of specialists from the Divisions of Corporation Finance, Enforcement and Investment Management to keep tabs on the ongoing and potential ICO issuances and issuers. It is clear that the SEC considers the ICO space at best a mistake-prone market, with participants who often lack basic knowledge of U.S. securities laws. According to this post, the Protostarr’s chief executive, for example, “admitted that Protostarr did not contact any legal counsel prior to releasing its white paper or launching its token.” The idea that Protostarr could be subject to any “specific laws” did not even cross its management’s mind.

Regulators Chime in, or Not

United States

Most who are following this space have already seen the SEC’s DAO report, covered in this blog. In the DAO report the SEC essentially concluded that a coin is a security if it meets the same old Howey test from 1946, even if you call that coin a token, a tulip or an orange. Soon after the DAO report the SEC issued an investor alert warning investors about public companies that are making ICO-related claims. The SEC is trying to keep an open mind, however. When asked whether SEC would allow an issuer to register an ICO with the SEC, Director Hinman said that it would, provided the proposed coin met the definition of a security and the issuer’s registration statement contained proper disclosure.


On the heels of the DAO report, the Monetary Authority of Singapore (MAS) clarified its position on ICOs, stating that if issued tokens “fall within the definition of securities,” their issuers will need to “register a prospectus with MAS” or find an exemption.


The Canadian Securities Administrators chimed in soon thereafter to say that cryptocurrency offerings are very likely to involve a sale of securities and would, therefore, come under CSA’s purview and be subject to Canadian securities laws. A Canadian provincial securities regulator (Quebec’s Autorité des marchés financiers (AMF)) then approved an ICO, but waived the disclosure and registration requirements, indicating that some provinces may be permissive in their implementation of the securities law requirements.


Earlier this month, China must have gotten completely ticked off by being left out of the accumulation-of-virtual-currency party and banned companies from raising funds through ICOs. China continued its campaign against small issuers and traders a week later by also banning cryptocurrency trading on exchanges, while continuing to allow larger scale over-the-counter trading. And to show who’s boss it also launched a wide investigation into 60 ICO platforms, according to multiple news outlets.


Russia did a characteristic flip from potential seven-year jail time for people who use cryptocurrencies to giving a green light to cryptocurrencies, especially Ethereum, and planning to regulate them on par with more traditional securities. It might have had something to do with a nod of approval from Russian President Vladimir Putin and a member of his entourage going ahead with a $100 million ICO to fund a Russia-based digital currency-mining operation. As a comical aside, at least one of Russia’s top executives thought Blockchain too prosaic and created his own version, Masterchain, instead.

European Union and Australia

Surprisingly enough, the European Securities and Markets Authority has neglected to make any specific pronouncements on the topic of ICOs thus far. It is most likely biding its time and taking the wait-and-see approach, perhaps wishing to avoid dealing with a complex system of local EU member rules and regulations. However, according to Director Hinman, the European authorities have been in touch with the SEC and have agreed with its leadership in this space. Like EU, Australia seems undecided and is continuing to watch the latest developments.

From Regulation to Litigation

So now that this new alternative world of cryptocurrencies is upon us and the people all over the world, young and old, well, let’s face it, mostly young, think that these shiny, new non-dollars and the unregulated non-IPOs are the best thing since Twitter, what’s next? The regulators are just waking up and drawing their various lines in the financial sand. But have we come full circle? Have we advanced from regulation to litigation? Of course we have.

This Bloomberg BNA news story lists three lawsuits filed against ICO issuers or exchanges on which they trade. Many others forecast that SEC enforcement will follow in short order as regulators get tired of making those discreet calls and start throwing the book at the obnoxious offenders. Things might not go very smoothly for the first few litigants. It might be hard for them, for example, to identify proper targets, clearly interpret evolving securities laws or pin down defendants sprinkled around the globe. I am certain, however, that all these problems will only add to the fascinating new twists and turns in the body of case law that is about to unfold.

For more information on all things Blockchain, Bloomberg Law subscribers can access the In Focus: Blockchain page on either the Banking & Finance Practice Center or the Tech & Telecom Practice Center.

To read more articles log in. To learn more about a subscription click here.