The SEC has finally provided some relatively clear guidelines for ICOs by settling charges with two ICOs, an ICO fund, and a token exchange operator. The takeaway, in general ICOs are securities.
NOTE: That is ICOs: CarrierEQ Inc. (Airfox) and Paragon Coin Inc, Crypto Fund who dealt with ICOs: Crypto Asset Management LP (CAM), and Token Exchange that dealt with ICOs: EtherDelta. See documents below.
Below I’ll explain every thing I’ve learned from reading the documents and statements the SEC put out and from listening to talking head crypto lawyers online. That means this is useful information for understanding the gist of what is going on and for being aware of the necessary documents, but it is ultimately a secondhand unofficial recanting of research (see a legal professional for professional legal advice).
From what I can tell, the charges don’t mean ICOs will be banned in the US, or that companies who issued tokens via an ICO have to shut their doors, or that exchanges can’t trade them, it simply means that companies who use ICO fund raising mechanisms or deal in ICO tokens need to file some forms (they need to register as dealing in securities or claim an exemption).
In other words, this is confirmation that digital assets and ICOs are A-OK… as long as they adhere to existing standards.
Moving on, to add to the above, it seems that this mostly applies to ICOs that launched after the SEC fired its first warning shot by publishing a warning in July of 2017 (see: July 2017 DAO Report of Investigation).
So for example Ethereum, which was launched in 2015, seems to be exempt (it was previously stated that Bitcoin AND Ethereum were not securities and notably both were created before July 2017 and Bitcoin never had an ICO round).
Lastly, for those who did get charged and settled with the SEC (they didn’t have to admit wrongdoing, they just had to agree to a few things), the penalty was almost uniformly the same. That is:
- Pay $250k to the SEC.
- Agree to pay back those who bought into the ICO and sold at a loss if they file a claim.
Given the above, any company who issued an ICO (or dealt with ICOs in any way; it really doesn’t matter in what respect or if they said they were a utility token or not), converted some of that money to dollars, files the forms, and pays the fees should in theory be fine.
Meanwhile, those ICOs who held their ETH all the way to now could put some sell pressure on the market. Especially if the ignore this round of SEC warnings and wait for what could be more severe charges down the road.
With that covered, it is important to note that there is a general worry/fear/expectation that this is only one phase of an overarching plan to provide clear direction for ICOs moving forward and for those who already launched (see this breakdown of the phase theory). Meaning, this round of rather light penalties and strong suggestions to file the forms is likely to be followed up with harsher penalties, logically speaking.
All the major exchanges and some of the major ICOs have already stepped up to the plate, but there is a good chance that there will be some collateral damage over the coming months as all the companies who ran ICOs are dealt with ICOs transition from illegal securities dealers and sellers to upstanding entities who have filed their paperwork.
The last thing to note is that this could effect how funds are raised in crypto moving forward.
For me the worst case is that funding moves from public ICO rounds to private VC rounds. This is worst case in that VCs will then get early access to tokens and Joe-public will start his journey buying on market at a premium. <—– although to augment this, and let’s be real, there are already a lot of pre-sale and seed rounds and pre-mines and such, so a lot of the time Joe-public is already in this situation or worse.
For the best case is that this weeds out some scams, makes token sales more fair, and helps ensure that the next wave of crypto is built on confidence. People probably don’t remember, but last year we weren’t sure whether crypto would be banned or not. Now we have futures, a potential ETF, Bakkt, and the start of clear rules for ICOs. That is progress… but hey, sometimes progress is messy, and certainly it isn’t the specific form of progress everyone wanted.
SEC ENF Co-Dir Peikin: “By providing investors who purchased securities in these ICOs with the opportunity to be reimbursed and having the issuers register their tokens with the SEC…… these orders provide a model for companies that have issued tokens in ICOs and seek to comply with the federal securities laws.”
Documents from the SEC: