On Monday, the U.S. Securities and Exchange Commission (“SEC”) Chairman Jay Clayton issued a statement on cryptocurrencies and initial coin offerings (“ICOs”) or token sales. At the same time, Chairman Clayton announced an enforcement action against Munchee Inc., halting Munchee’s sale of tokens following the SEC’s finding that its sale of tokens constituted the unregistered offer and sale of securities.
Chairman Clayton addressed his and the SEC’s view regarding the developing cryptocurrency and token sale market, setting forth consideration for those he considers “Main Street” investors and “Market Professionals”.
Consistent with previous SEC guidance, Clayton noted that he “believe[s] that initial coin offerings – whether they represent offerings of securities or not – can be effective ways for entrepreneurs and others to raise funding, including for innovative projects.” Chairman Clayton indicated the SEC’s concern is protecting investors, noting that there are “greater opportunities for fraud and manipulation” in the cryptocurrency and token sale markets as regulators determine how existing rules and regulations apply to tokens and token sales.
As to Main Street Investors, Chairman Clayton cautioned investors to (1) be aware that, to date, no initial coin offerings have been registered with the SEC; (2) make sure to ask questions and demand clear answers of the token issuers prior to investing in cyptocurrency-related products; (3) recognize that the cryptocurrency markets are international in nature and that rules and regulations outside those of the United States will likely apply to such investments; and (4) as the investment is likely international in nature, funds invested may very well end up overseas without the investor’s knowledge, thus amplifying the risk of making such investment beyond the reach and ability of the SEC and other U.S. regulators to pursue bad actors in the event of fraud or other malfeasance.
As to Market Professionals, Chairman Clayton stated that merely changing the form of the recording of a corporate interest from a central ledger to a blockchain entry on a distributed ledger does not change the fundamental nature of such corporate interest. He encouraged Market Professionals to review the SEC’s actions halting prior token sales and advised professionals to closely consider the nature of what is a security when advising clients involved in token sales. He cautioned that securities laws, and the application thereof, must always be considered prior to embarking on such an offering. Simply by calling something a “utility token,” “currency” or “currency-based product” does not in and of itself remove the sale of such item from U.S. securities rules and regulations. Thus, he stated that “[b]efore launching a cryptocurrency…its promotors must either (1) be able to demonstrate that the currency or product is not a security or (2) comply with applicable registration and other requirements under U.S. securities laws.”
This article is not intended to provide legal advice, and no legal or business decision should be made based on its contents.