The SEC said today that some initial coin offerings (ICOs) may qualify as securities sales – a move that while expansive in impact, wasn’t that surprising to legal and regulatory observers in the space.
As CoinDesk reported earlier today, the US agency revealed that it has completed an investigation into the creation and subsequent collapse of The DAO, the ethereum-based, smart contract-powered funding vehicle that fell apart following a devastating code exploit last summer. Ultimately, it did not take action against those behind the project.
Still, as part of its review, the SEC found that tokens issued in conjunction with the project were captured under its definition for securities, and it notably said that other tokens sold by way of an ICO fundraising model could receive a similar qualification as well.
Reaction to the finding was swift.
Washington, DC-based lawyer Stephen Palley told CoinDesk that the agency’s release “confirms that securities laws don’t stop at computer keyboard”, but that it was “frankly, not a huge surprise.”
Palley went on to speak to the uncertainty in the SEC’s statements – namely, its lack of determination on which blockchain tokens qualify as securities and which do not.
He told CoinDesk:
“What remains unclear is how the SEC will view many other token sales that have since taken place in the US, directed by US citizens. Those that have adopted creative workarounds to address securities laws may be wondering if their approach was sound.”
No surprises here
That lack of surprise was shared by other commentators reached by CoinDesk staff.
Preston Byrne, a technology lawyer with expertise in cryptocurrencies, said that “the only thing I find surprising about the SEC’s findings is that it took this long to publish them.”
A long-time critic of the concept, he spoke of what could be a coming crackdown on what had been an active sector of the industry.
“Smarter token issuers [have] taken great pains to keep these offerings out of the US and avoid listing their tokens on US-based exchanges,” he continued. “Whether that is sufficient to avoid liability in the US is something which will vary on a case-by-case basis.”
Steven Obie, a partner at international law firm Jones Day, added that those with experience in securities regulation weren’t be surprised either.
“Those formulating an ICO need to account for today’s action by the SEC, seek guidance from experienced counsel in formulating their ICO and analyzing the legal issues, and consider dialoguing with SEC staff,” he said.
More action to come?
Perhaps one of the most notable elements of the release was the fact that the SEC didn’t issue a blanket characterization for blockchain tokens as securities – rather, it said that those determinations would be made on a case-by-case basis, with some falling in that definition and others outside it.
Coin Center director of research Peter Van Valkenburgh argued that those classifications will boil down to whether a token has a functional utility as opposed to acting as a vehicle for speculation.
“We believe that applying the same facts and circumstances test to other tokens will mean that some do not fit into the definition of securities, particularly tokens with an underlying utility rather than a mere speculative investment value,” he said in an email.
Outcome aside, commentators like Perianne Boring, founder of the non-profit industry advocacy group the Chamber of Digital Commerce, reckoned that the move ultimately signals that the SEC is likely to take more action in this area.
Boring told CoinDesk:
“We view this as a shot across the bow to those who are issuing or plan to issue tokens that the SEC will aggressively apply its laws.”
Michael del Castillo contributed reporting.
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