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During a speech at the Institute on Securities Regulation, the Chairman of the U.S. Securities and Exchange Commission, Jay Clayton, made a statement about a very important question for the future of ICO’s.
“I have yet to see an ICO that doesn’t have a sufficient number of hallmarks of a security,”
With this statement, the chairman took a noticeably more aggressive stance than in July, when the SEC had stated that an ICO can potentially be a security, depending on the facts and circumstances of each ICO. After the speech, when Mr. Clayton was asked to clarify his unscripted statement on ICO’s, he continued:
“When you depart from the bitcoin or the ethereum, and you get into the tokens, the hallmarks become pretty clear…”
These remarks are a sign that the SEC is not as ICO friendly as many in the industry would like.
Only last week, the SEC warned about celebrity endorsement of ICO’s. Earlier this year, in the DAO case, the SEC already indicated that the application of securities laws to blockchain-issued tokens will happen by application and interpretation of the Howey-test.
ICO’s and the Howey test
Under the Howey-Test, a purchase of tokens is an investment contract (security) under securities regulations if there is (1) an investment of money (2) in a common enterprise (3) with an expectation of profits (4) which results from the efforts of others. When a token passess this four-prong test, any offer and sale thereof is subject to the federal securities laws.
Essentially startups wishing to do an ICO would have to register with the SEC and provide extensive disclosure documents. Material misstatements in these documents and other violations of the required procedure lead to liability. As such, startups would require law firms and other gatekeepers to help navigate a legal minefield that is usually reserved for IPO’s.
The costs of an IPO of navigating this minefield is usually somewhere between 1 and 6 million dollars, and, as such, it makes sense to try and structure tokens in such a way that they do not meet the criteria set forth in SEC Vs. Howey.
I will not provide an analysis of the different criteria as set forth in Howey and later case law here. For no I will only say that anyone wishing to do an ICO should find a good law firm.
Let it be noted however that the Securities Act and the Securities Exchange Act are no joke, and that, as they have extra-territorial jurisdiction, non-US companies and individuals have to comply with them when selling tokens to a US investor, regardless of the actual place of incorporation or what nationality.
Aside from the SEC, Regulators worldwide have taken a variety of stances. Whereas some jurisdictions have completely banned it, such as China and South Korea, others seem to be more open to the new way of raising funds, including the UK, Canada and France.
It remains to be seen whether ICO’s will increasingly start excluding U.S. citizens, but it looks increasingly likely.