by Aleksander Dyo, co-founder and president of Token IQ,
The Securities and Exchange Commission’s (SEC) Division of Enforcement recently released its fiscal year 2018 report, in which it reiterates the clear dangers and possible frauds that ICOs pose. In our opinion, the report’s delineation of the numerous risks and regulatory breaches incurred by ICOs signals the SEC’s commitment to further investigate and crack down on “bad actors.” It is critically important to have a clearly defined framework for ICOs, to preserve the stability, security, and transparency of the United States’ capital markets and protect “Main Street” investors, while also keeping pace with adoption of blockchain and distributed ledger technologies.
The question at hand is whether the SEC will approach the regulatory framework by treating ICOs as a de novo security instrument or as simply the next step in the modernization of existing security instruments – applying existing regulations to new ICOs. Token IQ’s view is to treat ICOs as a hybrid type of securities, which would result in the issuance of two distinct types of tokens. The issuance of the tokens during the capital-raising stage should be treated as a security token, falling under the Securities Act of 1933, and be subject to the Howey test. This token would have all the attributes of a traditional security, such as direct participation in investments, profit sharing, voting rights, dividends, etc. Then, after the raise is completed, the issuer can issue a second type of token, which would function as a utility token and not participate in any secondary markets but could be traded on a private “ecosystem.” This second token may be utilized as a reward or exchange mechanism.
By developing a framework which follows the aforementioned outline and ensuring that ICOs and STOs adhere to any existing and forthcoming regulations – as opposed to having issuers attempt to circumvent existing securities laws and regulations in an attempt to force the hand of regulators to imprudently expand the breadth of new regulations – the capital markets industry can ensure its continued success, as well as the safety and protection of investors.
Finally, it would be beneficial to the industry, and would assist the SEC in effective allocation of its resources, to realize the eventual formation of a self-governing and self-regulating body, comprised of ICO and STO players in the industry, similar in fashion to the Financial Industry Regulatory Authority (FINRA) or the Securities Industry and Financial Markets Association (SIFMA). This organization would be a self-governing collaboration with regulators, remaining safely within the letter and spirit of existing security laws framework.
Aleksander is a serial entrepreneur, investor and advisory board member in several fin-tech, real estate, entertainment, hospitality companies, SPVs and JVs valued at $200mil+. He is a Registered Investment Adviser with a deep background in marketing, private equity, private placement, capital markets, strategic planning and risk management. He has over 15 years in wealth management, insurance based transactions and business consulting; founded and continues to lead multiple financial services “retail” and “wholesale” ventures.
Dyo’s photo courtesy of Token IQ via communications firm Red Rooster Public Relations