In his remarks at a recent Practicing Law Institute program on securities regulation, Securities and Exchange Commission Chairman Jay Clayton once again addressed Initial Coin Offerings, or ICOs. Mr. Clayton highlighted several issues in particular, including that in his view there is a lack of information about many online platforms that list and trade virtual coins or tokens offered and sold in ICOs, and that trading of tokens on these platforms is susceptible to price manipulation and other fraudulent trading practices.
As we noted previously, in July the SEC released a report of investigation regarding potential federal securities law violations involving a platform called The DAO and its related entities. Although the SEC determined not to pursue enforcement action there, the SEC’s report stated that the digital tokens issued by The DAO in its ICO qualify as “securities” under the Securities Act of 1933 and the Securities Exchange Act of 1934. In the months since, the SEC has taken enforcement actions with respect to several companies that have, or indicated that they were likely to, engage in ICOs, including temporary trading suspensions and a civil complaint.
A key takeaway of the SEC’s report and subsequent enforcement activity is the necessity of considering the securities laws when structuring an ICO. If the token is deemed to be a security, then the ICO must be registered with the SEC under the Securities Act or an applicable exemption from the registration requirements must be available. As reported by the Wall Street Journal, in unscripted remarks during his PLI speech, Mr. Clayton said that “I have yet to see an ICO that doesn’t have a sufficient number of hallmarks of a security.” Mr. Clayton’s remarks highlight that ICO-issuers should proceed with caution, serving as a reminder that ICO practice and the SEC’s views in this area continue to develop.