The SEC and ICOs: Winter is Coming

The article linked below is one of the most important I have read in the many years I've been involved with Blockchain.

If you are involved in any way with ICO's, or intend to be involved with ICO's whether as an organizer, promoter, or investor it is IMPERATIVE that you read this article in its entirety. Then you may want to review it with a competent, experienced ICO / cryptocurrency attorney and discuss the implications.

I will make some personal observations and highlight some of the article's key points below the link. But first, here is the article:

ICO's can be a valid and effective way for legitimate organizations to raise money. BUT, they must do it correctly. If they are intending to offer securities, they must register as appropriate with the SEC. And if their intention is NOT to offer securities, it is not nearly enough to simply say so. They must jump through a series of hoops to ensure that their offerings are not misconstrued as securities.

Finally, keep in mind that it is not enough to simply demonstrate that your ICO is legitimate and following all of the rules. You have to be able to demonstrate that it is designed, implemented, and operated in such a way so that even unrelated third-parties cannot use your ICO to launder money or take other such illegal actions. In such a case, your ICO could be considered an accessory to the crime, and you could end up spending time in jail.

Here are some of the specific steps the author emphasizes that legitimate ICO participants should take to minimize the possibility of unintended negative consequences from their ICO:

"Companies involved with ICOs should carefully review FinCEN’s guidance on he Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies and obtain compliance advice and counsel when necessary. If legitimate businesses conduct Bitcoin ICOs with shady characters, their actions could nonetheless raise AML red flags by facilitating such transactions.

"On the same day as the DAO 12(a) Report, the SEC released an Investor Bulletin that provided recommendations for companies looking to issue tokens through an ICO, including the following:

• The SEC will interpret certain ICOs, such as the DAO offering, as the offer and sale of securities;
• ICOs may inappropriately entice investors by guaranteeing high returns or low risk in a new technology and investment space;
• Virtual currency exchanges and other entities holding virtual currencies may be vulnerable to fraud, technical glitches, hacks and malware, and virtual tokens or currency may be stolen by hackers
• If the tokens issued as part of the ICO can be considered securities, then the virtual coins or tokens must be registered with the SEC, or the sale must be made pursuant to an exemption from registration;
• Companies planning ICOs should carefully review the criteria for exemptions from registration, including the provisions relating to accredited investors and other restrictions involving net worth or income requirements, and should satisfy the criteria for those exemptions for US investors should the token be considered a security;
• The SEC will likely scrutinize representations that particular ICO offerings are exempt from registration;
• Sales of tokens as part of crowdfunding should adhere to the requirements of the SEC’s crowdfunding regulations (called Regulation Crowdfunding) and other relevant securities laws;
• If the virtual token or coin is a security, “investment professionals and their firms who offer, transact in, or advise on investments” must be licensed or registered in accordance with federal and state securities laws; and
• The SEC will scrutinize what it considers to be “jargon-laden pitches, hard sells, and promises of outsized returns.”

"The Bulletin also outlined several warning signs that investors should look for when considering participating in an ICO:

• Opportunities that guarantee outsized returns, especially those that advertise “little or no risk”;
• Unsolicited sales pitches (e., scenarios where the potential purchaser does not know the sender and did not request the information);
• Pressure to buy immediately or creating a sense of urgency;
• ICOs offered by unlicensed individuals or firms; and
• Lack of net worth or income requirements or investment limits, especially where the ICO involves the offer or sale of securities.

"My prediction is that in the coming year or two, the SEC will initiate a slew of ICO-related enforcement actions, perhaps even a sweep, where a multiple and variety of matters are all announced and filed at the same time, causing a virtual earthquake in the ICO industry.

"What will follow in the short-run won’t be pretty – there will be some blood on the floor in the form of lost investments from good, honest wide-eyed investors who had tried to capitalize on the cryptocurrency phenomena.  But what will follow in the long-run (if possible) will be a more fulsome, more transparent, more reliable, more efficient and far healthier cryptocurrency marketplace."