A hot-button topic lately has been the burgeoning industry of cryptocurrency and the growth of blockchain technology. While there is plenty of room to argue its virtue, most everyone paying attention agrees at the very least the crypto-space has the potential to be, for better or worse, world-changing technology.
The global excitement and speculation surrounding this technology is reflected in phenomena such as the world’s biggest price bubble since the Dutch Tulip mania of the early 17th century and the advent of ICOs (“Initial Coin Offerings”), enabling companies to raise massive amounts of money extraordinarily quickly. In fact, the pace at which the technology is evolving, expanding, and empowering companies to solicit funds has left some regulatory agencies trying to catch up.
Foremost among them is the SEC (“Securities and Exchange Commission”). In early February, the Chairmen of both the SEC and the CFTC (“Commodity Futures Trading Commission”) testified before the Senate Banking Committee on the topic of cryptocurrency. The comprehensive testimony acknowledged the good, the bad, and the ugly with regard to cryptocurrency and how it fits (or doesn’t fit [1]) into our current regulatory framework.
The fundamental question remains whether cryptocurrencies, tokens, and ICOs fall under the purview of the SEC. If so, many companies considering ICOs would need to undergo the costly process of registering their offerings with the SEC. It is important to note that “to date no ICOs have been registered with the SEC. Further, the SEC has not approved for listing and trading any exchange-traded products (such as ETFs) holding cryptocurrencies or other assets related to cryptocurrencies.” [2]
The testimony was certainly a step in the right direction in terms of providing some much-needed clarity in the space and helps companies thinking about an ICO do so in a more compliant manner.
On the one hand, it appears the SEC, at least currently, does not formally recognize a distinction between “security” tokens and “utility” tokens. For now, they are all securities. [3] For the many companies that sought to rely on the security vs. utility distinction to evade classification as a security—and thus regulation by the SEC—that approach should no longer be considered advisable.
Of equal importance, though, is the optimism and respectful tone with which the Chairmen addressed cryptocurrency and blockchain technology. A far cry from the total restrictions implemented in other countries around the world, the regulatory bodies of the U.S. have now directly acknowledged the “enormous potential” of the technology.
Ultimately, while the SEC does not appear to have any intention to stifle or ban the innovations of blockchain and cryptocurrency, they do intend to regulate it “vigorously.” This means companies considering fundraising through ICOs need to be aware of the various SEC exemptions that may be applicable to them, as well as the registration process in general.
If your company is considering an ICO or other form of token offering, understanding the current landscape from a securities law perspective is critical to avoid potential pitfalls and complications in the future.
[1] “The currently applicable regulatory framework for cryptocurrency trading was not designed with trading of the type we are witnessing in mind. … we are open to exploring with Congress, as well as with our federal and state colleagues, whether increased federal regulation of cryptocurrency trading platforms is necessary or appropriate,” SEC Chairman Jay Clayton said at the Senate Hearing.
[2] See, https://www.banking.senate.gov/public/_cache/files/a5e72ac6-4f8a-473f-9c9c-e2894573d57d/BF62433A09A9B95A269A29E1FF13D2BA.clayton-testimony-2-6-18.pdf
[3] “While there are cryptocurrencies that, at least as currently designed, promoted and used, do not appear to be securities, simply calling something a “currency” or a currency-based product does not mean that it is not a security. To this point I would note that many products labeled as cryptocurrencies or related assets are increasingly being promoted as investment opportunities that rely on the efforts of others, with their utility as an efficient medium for commercial exchange being a distinct secondary characteristic,” SEC Chairman Jay Clayton said at the Senate Hearing.
