For SEC, Subpoenas No Mere “Token Interest” In ICOs

11. March 2018.








A hammer? A velvet hammer? A helping hand?

No one knows at this point, when it comes to a duo of acronyms now inextricably linked: The SEC and ICOs.

Last week, of course, the U.S. Securities and Exchange Commission issued scores – the tallies varied depending on where you got the news, but The Wall Street Journal estimated “dozens” – of requests for information and subpoenas from companies who have dipped, or are dipping, corporate toes in the initial coin offerings pool.

This is no token overture on tokens.

We need no recap on the ways ICOs have gone in recent months. Some have done well, some have tanked, some have been outright fraudulent. Hucksters abound in a nascent industry.

Caveat emptor, goes the saying – and the caveat, or beware, has been presaged by the SEC for a while. None other than chief of the agency, Jay Clayton, has said that investors have to “think long and hard” as they consider pulling the trigger and joining in on the ICO excitement.

For the companies that grab the investors’ attention and dollars, the payoff can be significant, to the tune of millions – make that many millions – of dollars. estimates that the average amount in its “biggest ICO index” stands at $59 million.

The goals by and large may be noble ones, as real companies come to market and bypass traditional conduits – saving time, perhaps, as they want to bring new services and ideas tied to blockchain to fruition.

And yet: How and why to regulate? And where – and just who should do the regulating?

The SEC has its work cut out for it, seemingly. The landscape is an unregulated one. And the debate hinges on some key tenets: Are ICOs really securities? If so, some measures come into play – aimed at shielding investors from fraud, and well, unleveled playing fields – that haven’t been in play. (Yet. Perhaps.) Education and transparency are key.

Those who think the ICOs are ways of offering only “utility tokens” look to find, it seems, ways around SEC standards. But then again, Clayton has said that simply putting that utility label on the ICO does not immediately “prevent the token from being a security.”

As the landscape takes shape, Nimish Patel, a securities lawyer with Mitchell Silberberg & Knupp, said in an interview with PYMNTS that “there are several things that are happening … you’ve got several major U.S. federal agencies that are trying to figure out if something is under their purview and should they [even] be regulating this.”

The SEC is the lead agency on this, he said, and questions abound as to whether cryptos are assets or commodities, and whether the CTFC should be involved. If defined as currencies, should the Department of Treasury be involved?

“Obviously, there are tax issues and you’ve got the IRS involved,” said Patel.

Amid the alphabet soup of regulators, the firms likely to be regulated “do not even know what they are building yet, let alone how to comply with what those rules and regulations might be.”

And keep in mind that the regulation looms at the federal level, with discussions to be had at the state level, of course.

Said Patel of the ICO-focused firms themselves: “My concern is that we need one agency to rule them all so they know what they need to do to be in full compliance.”

And as for the fact that the SEC has held back even while other countries have seen regulators crack down a bit (yes, China and South Korea), the fact that shots have been lobbed across the bow means that “my gut is telling me that the hunch that the SEC has is that many of these ICOs that have been completed did not comply with federal securities laws.” Thus, the firms that have been on the receiving end of the information requests/subpoenas also serve as an example (or, we at PYMNTS wonder, perhaps a warning?) for firms that are even contemplating tackling an ICO.

This all comes against a backdrop where ICOs have become mainstream, of course, in a world where, as Patel noted, millennials and waiters and casual talk – anywhere – revolves around the latest and greatest cryptos.The unaccredited investor now has skin in the game – and, as Patel told PYMNTS, for the SEC “alarms are ringing.”

At the moment, the aim of the SEC may be to prevent accredited investors from “flipping” their ICO holdings to the unaccredited, less savvy investors who are not as able to absorb the blow of (possible) losses.

The SEC’s quest for information touches on interrelated relationships at these startups, said Patel.

“You’ve got the startup that is doing the financing, you’ve got a whole bunch of advisors, including certain gatekeepers, like securities lawyers, that might have given advice to these companies. They may have taken the position that the ICO that they have done is not a security, and [you may not] need to comply with the securities laws.

“The question is: Are these companies really acting in good faith, or did they truly ignore what the laws were?

“I think this is more of a fact-finding mission for them,” he told PYMNTS “… and they may find a few bad actors out there and make an example of them.”

For now, think of last week’s activity as a fact-finding mission rather than a finger-pointing one.

Asked by PYMNTS where U.S. regulators could take a playbook page, Patel said Japan is leading the charge here, that they recognize an opportunity. “What I am hearing from the ecosystem out there is that it seems to be very friendly” and that regulators understand the blockchain tech and the cryptocurrencies. Japan, of course, has taken the leap to require exchanges to be registered with regulators.


In FinTech news across the pond, the European Commission is looking to put in place crowdfunding “passports” that would help foster growth among FinTech firms and across the region.

In a statement, Valdis Dombrovskis, the EU financial services commissioner, said “an EU crowdfunding license would help crowdfunding platforms scale up in Europe.” The passport is being proposed as draft legislation and would be tied to crowdfunding campaigns over 12 months up to one million euros. Reuters has noted that thus far, there are no pan-EU rules that govern crowdfunding, as there exists a patchwork of rules that vary by nation.

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