On December 11, 2017, in the midst of the holiday rush, the Securities and Exchange Commission’s Chairman, Jay Clayton, issued a statement on cryptocurrencies and initial coin offerings (ICOs). You can find the statement here. The statement is directed at main street investors and market professionals, including securities attorneys. The statement is officially that of the Chairman and not the SEC, but it reiterates the SEC’s position that both cryptocurrencies and ICOs will be reviewed to determine if they are securities. The statement also posits that the concept of a “utility token” can elevate form over substance. This is crucial to understand, as some companies conducting ICOs are relying on the description and utility of their coin as a way to avoid compliance with federal securities law. This is folly. The SEC has and will continue to scrutinize cryptocurrencies and ICOs, and has recently issued a high profile cease and desist order. The SEC applies longstanding analysis to make the determination if something is a security. In a simple example, the statement highlights that the SEC finds it “especially troubling when the promoters of these offerings emphasize the secondary market trading potential of these tokens. Prospective purchasers are being sold on the potential for tokens to increase in value – with the ability to lock in those increases by reselling the tokens on a secondary market – or to otherwise profit from the tokens based on the efforts of others. These are key hallmarks of a security and a securities offering.” The allure of cryptocurrencies and ICOs is real and we increasingly are asked questions by our clients related to various aspects of the markets. To participate in ICOs, as a company, investor or otherwise, without the advice of knowledgeable counsel is incredibly risky. There is no doubt that additional SEC enforcement actions will roll out in 2018.
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