How to Stay on the Safe Side of SEC’s Crackdown on ICOs

By Advertiser Disclosure
This post contains affiliate links, and CoinDiligent will be compensated if you make a purchase after clicking the links.

Recent actions clearly show the U.S. Securities and Exchange Commission (SEC) has been hard at work cracking down on Initial Coin Offerings (ICOs). The first phase focused on fraudulent ICOs and scams. The second phase is focused on compliance with regulatory frameworks.

As a compliance framework matures, we can also be fairly certain that SEC regulations on ICOs are forthcoming. Here’s how to stay in the green.


SEC Cracking Down on ICO Scams

The SEC began warning investors of potential ICO dangers in early 2017. Its crackdown on ICO scams is ongoing for nearly a year, with the first SEC Cyber Unit charges filed in December 2017 against the operators of PlexCoin. The fast-moving ICO raised roughly $15 million by falsely claiming investors could make 1,300% returns per month.

“This first Cyber Unit case hits all of the characteristics of a full-fledged cyber scam and is exactly the kind of misconduct the unit will be pursuing,” said Robert Cohen, chief of the Cyber Unit.

PlexCoin was targeted by the SEC as a scam, but returning the $15 million collected from investors isn’t likely.

The SEC Cyber Unit continued cracking down on fraudulent ICO practices and scams throughout 2018.


SEC Requires ICO Registration

Now the SEC may have developed a template for cracking down on ICOs violating existing regulations. On November 16, 2018 the SEC announced settled charges against Paragon Coin and Carrier EQ for token sale registration violations. These were the first cases where the SEC imposed civil penalties for ICO registration violations.

Current regulations specify selling securities in interstate commerce in the U.S. requires SEC registration, unless criteria for an exemption are met. Neither company registered, nor met the exemption criteria.

In Cease-and-desist orders filed, the SEC claims each company’s token meets the Howey Test for determining if an asset is a security. Based on that, the SEC claimed each company broke U.S. securities laws by not registering their ICO with the SEC.

According to Stephanie Avakian, co-director of the SEC’s enforcement division, “We have made it clear that companies that issue securities through ICOs are required to comply with existing statutes and rules governing the registration of securities. These cases tell those who are considering taking similar actions that we continue to be on the lookout for violations of the federal securities laws with respect to digital assets.”

Going forward blockchain projects with ICOs must ensure compliance with SEC regulations and federal laws governing the registration and issuance of securities. This could slow the number of ICOs for investors, but it should also increase the quality of those conducting ICOs.


A Pattern Emerging

There are similarities in both cases showing a pattern from the SEC. First, they are almost identical in their structure, and in the language used. The introduction and language describing penalties and remedial actions is identical. This shows the SEC has developed, or is in the midst of developing, a template for ICO registration enforcement.

If the SEC has a template for enforcement, it will be a simple task to monitor new and existing ICOs and file boilerplate orders against any that have a U.S. presence. Unfortunately it’s impossible to tell if such a template exists at this time. It will become increasingly clear if we see more enforcements following a pattern similar to those seen in the Paragon Coin and Carrier EQ cases.

It’s also easy to see that each order contains detailed facts originating from publicly available records. These include public statements, online comments, website and white papers among others. These types of facts will inevitably be available for any project, making it easier on the SEC when filing.

This isn’t necessarily a bad thing for projects launching an ICO, but it’s something to be aware of, especially if it lends evidence to prove a token is a security.


In Conclusion

Based on SEC statements and actions over the past 18-24 months it’s clear there’s a regulatory framework being developed in response to the rise of the ICO. It began with warnings that tokens were securities, continued as fraudulent ICOs came under fire, and now has the SEC actively pursuing civil cases over registration requirements.

The oversight and regulation of ICOs is becoming increasingly demanding, and we can expect that trend to continue. Investors can also expect the SEC enforcement actions to increase, given the apparent existence of an enforcement template.

Investors will need to exercise their best due diligence with new ICOs, ensuring projects are transparent about their team and have a viable product. It’s also increasingly important to verify compliance with federal securities laws, but investors should understand the SEC works to protect the investor. Regulatory changes are beneficial in the long run, keeping investors secure against fraud and scams within the ICO space.

Leave a Comment