TechCo’s Ignore SEC Warnings on ICOs
Some technology companies looking to raise money by issuing digital coins are moving ahead with plans despite an SEC decision that their offerings may well be subject to toughen US securities laws.
Such ICos (initial coin offerings) have helped startups to raise $1-B YTD, but until last week it was unclear how the US Securities and Exchange Commission (SEC) would treat such transactions.
Last Tuesday, the SEC decided that “tokens: issued through the ICOs can be considered securities, meaning they would fall under laws that require disclosures and are subject to regulatory scrutiny to protect investors, unless a valid exemption applies.
Some industry participants and analysts thought such a decision would have a chilling effect on the ICO market.
But, since that pronouncement, 20 new ICOs were announced with more than 120 scheduled to launch this year, according to ICO tracker tokendata.io.
During an ICO, contributors send digital currencies like Bitcoin (BTC) and receive new tokens in return. Those tokens are then listed on cryptocurrency exchanges where they can be traded for other types of tokens. (reut.rs/2sFKLAm)
Even as some ICOs have been criticized for failing to disclose information about underlying businesses and the way tokens are distributed, the frenzy surrounding the events has drawn backing from prominent VCs (venture capitalists) and Celebrity speculators.
Boxing Champion Floyd Mayweather took to Facebook (NASDAQ:FB) Thursday to say he was participating in the ICO of a company called STX technologies Ltd this week.
It is not clear how much US regulatory scrutiny the upcoming offerings will attract. Unlike a regular securities offering, ICOs have had limited disclosures and most participants do not get any equity rights.
The most likely exemption to the SEC rule refers to tokens that would have utility for a specific project.
Many tech companies that pursue ICOs say their tokens are just that: “utility tokens,” which are necessary to activate their products or accelerate their development.
Charley Cooper, Managing Director of R3, a consortium of banks looking at using the technology behind digital currencies, said companies looking at ICOs needed to be certain the exemption applied to them.
“Anyone is who is contemplating doing an ICO now had better call their general counsel and fully understand securities laws in the U.S. and how they apply in their case,” he said.
“This wasn’t some vague policy that they floated. This is the division of enforcement of the SEC saying that if you operate in this market you need to follow the regulations.”
The SEC ruling raises questions for digital currency exchanges such as Bittrex that facilitate trading after an ICO.
Crypto-exchanges may be required to register with the SEC if they trade tokens considered securities and are based in the United States or have US customers.
The CEO of US-based Bittrex, said he sees no need to register his exchange with the SEC because it does not plan to trade securities on its platform, only utility tokens.
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