Earlier this year, Securities and Exchange Commission (SEC) Chair Jay Clayton delivered the opening remarks at the Securities Regulation Institute. In his speech, he stated that initial coin offerings (ICOs) can be effective ways for entrepreneurs and others to raise funding for innovative projects. He also believes that tokens and offerings that “feature and market the potential for profits based on the entrepreneurial or managerial efforts of others contain the hallmarks of a security under U.S. law.” However, while he acknowledges that some cryptocurrencies do not appear to be securities, simply calling something a “currency” or a currency-based product does not mean that it is not a security.
As the SEC continues to actively protect investors from unregistered or fraudulent ICOs, Clayton has urged market professionals, especially gatekeepers, to focus on their responsibilities to protect “Main Street” Investors. Market professionals would include (for example) broker-dealers, investment advisers, exchanges, lawyers and accountants.
Here are four things that the SEC wants market professionals to know about ICOs
- Use caution before promoting offers and selling coins.
Market participants should use caution when promoting or touting the offer and sale of coins without first determining whether the securities laws apply to those actions. Similarly, those who operate systems and platforms that effect or facilitate transactions in these products should be aware that they may be operating unregistered exchanges or broker-dealers that are in violation of the Securities Exchange Act of 1934.
- The SEC protects investors, and expects you to (as well).
Gatekeepers and others, including securities lawyers, accountants and consultants, should be guided by the principal motivation for the SEC’s registration, offering process and disclosure requirements: Investor protection and, in particular, the protection of Main Street investors.
- SEC Report of Investigation on Coin or Token Offerings
Market professionals, including securities lawyers, accountants and consultants, are encouraged to read closely the 21(a) Investigative Report the SEC released in 2017, concluding that a particular token was a security.
- Know when an exchange needs to be registered.
If a platform offers trading of digital assets that are securities and operates as an “exchange,” as defined by the federal securities laws, then the platform must register with the SEC as a national securities exchange or be exempt from registration.