United States federal government agency the Securities and Exchange Commission (SEC) has cautioned market participants that offers and sales of digital assets by “virtual” organizations are subject to the requirements of the federal securities laws.
Firms using blockchain or distributed ledger technology carry out such offers and sales under the name of “Token Sales” or “Initial Coin Offerings (ICOs),” said the SEC in a press release it sent to CoinReport, adding that regardless of the technology or terminology used, whether a certain investment transaction involves the offer or sale of a security will depend on the circumstances and facts, including the transaction’s economic realities.
The SEC’s caution comes with its investigative report titled Report of Investigation, which determined that tokens offered and sold by a “virtual” organization called “The DAO” were securities and therefore subject to the federal securities laws.
The Report confirms that issuers of blockchain or distributed ledger technology-based securities must register offers and sales of such securities unless a legal exemption applies. Those taking part in unregistered offerings also may be liable for violations of the securities laws. Moreover, securities exchanges providing for trading in these securities must register unless they are exempt. The aim of the registration provisions of the federal securities laws is to make sure that investors are sold investments that have all the proper revelations and are subject to regulatory scrutiny for investors’ protection.
SEC Chairman Jay Clayton said in the press release we received, “The SEC is studying the effects of distributed ledger and other innovative technologies and encourages market participants to engage with us. We seek to foster innovative and beneficial ways to raise capital, while ensuring – first and foremost – that investors and our markets are protected.”
William Hinman, director of the Division of Corporation Finance, commented, “Investors need the essential facts behind any investment opportunity so they can make fully informed decisions, and today’s Report confirms that sponsors of offerings conducted through the use of distributed ledger or blockchain technology must comply with the securities laws.”
The SEC’s Report grows out of an investigation that the agency’s Enforcement Division conducted in order to ascertain whether The DAO and related entities and persons violated federal securities laws with unregistered offers and sales of DAO Tokens in exchange for digital currency ether. The DAO has been designated a “crowdfunding contract,” but it would not have met the requirements of the Regulation Crowdfunding exemption because, among other things, it was not a broker-dealer or a funding portal registered with the Financial Industry Regulatory Authority and the SEC.
Stephanie Avakian, co-director of the SEC’s Enforcement Division, stated, “The innovative technology behind these virtual transactions does not exempt securities offerings and trading platforms from the regulatory framework designed to protect investors and the integrity of the markets.”
Steven Peikin, co-director of the Enforcement Division, added, “As the evolution of technology continues to influence how businesses operate and raise capital, market participants must remain cognizant of the application of the federal securities laws.”
In consideration of the circumstances and facts, the SEC has determined not to bring charges in this example, or make discoveries of violations in the Report, but rather to caution market participants and the industry. The agency explained in the release that the federal securities laws apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a conventional firm or a decentralized autonomous organization, regardless whether those securities are obtained using U.S. dollars or cryptocurrencies, and regardless whether they are distributed in certificated form or through blockchain technology.
The SEC’s Office of Investor Education and Advocacy released an investor bulletin educating investors about ICOs. The bulletin also states that digital coins or tokens may be securities and subject to the federal securities laws, which provide investors with disclosure requirements and other important protections. Furthermore, it reminds investors of signs of investment fraud, and that new technologies may be employed to perpetrate investment schemes that may not adhere to the federal securities laws.
Members of the SEC’s Distributed Ledger Technology Working Group (DLTWG) – Daphna A. Waxman, Pamela Sawhney, and Valerie A. Szczepanik, who heads the DLTWG – conducted the SEC’s investigation in this matter in the New York Office with assistance from others in the agency’s Divisions of Trading and Markets, Investment Management, and Corporation Finance. Lara Shalov Mehraban, associate director for enforcement in SEC’s New York regional office, supervised the investigation.
The Report of Investigation can be downloaded from here.
SEC logo – Public domain image
Jay Clayton’s photo – Via SEC’s media kit
William Hinman’s photo – Via his bio on SEC’s website
Stephanie Avakian’s photo – Via her bio on SEC’s website
Steven Peikin’s photo – Via his bio on SEC’s website