On Tuesday of 6th February, 2018, the United States’ Securities and Exchange Commission (SEC) released a statement that indicated that a number of ICO coins are to be classified as securities. This implies that such securitized ICO tokens emanating from the Jurisdiction of the US or that allows the participation of individual American citizens in their token sales are to be subject to SEC regulations.
This might not be altogether new or unexpected for participants in the ICO space. There have been several moves made by the SEC to ensure that security tokens (tokens that are related to investments and interest returns) comply with laid down regulations so as to safeguard the interests of the American investor. This has become particularly important in a time where a number of start-ups and small companies are raising millions of dollars worth of cryptocurrencies in their ICOs – and in many cases from ordinary citizens/investors.
ICO which stands for Initial Coin Offering is the process through which blockchain technology based firms raise funds to propel their projects. This is similar to what corporations do when they raise an IPO but the difference here is that ICO investors only purchase tokens offered by these blockchain tech companies and it does not necessarily translate into owning shares of the companies.
This SEC release comes on the back of investigations into some ICOs, particularly one that was backed by German Corporation called DAO (Decentralized Autonomous Organization) which garnered over $100 Million last year through its ICO. The DAO ICO basically got people to purchase their project tokens which are to be used to participate in their automated investment/trading strategies and the token holders get entitled to some promised returns. It is basically likened to the receiving dividends on investments – this therefore rightfully has got the SEC classifying DAO tokens as securities which must fulfill and abide by the guidelines as set by it.
The SEC’s conclusions only applied to the DAO and possibly other related security tokens but no other guidelines were given about ICOs. It however noted that circumstances and functions of ICO tokens will determine whether or not it is a security or a simple utility token. The SEC also to an extent admits that ICOs are here to stay;
“This Report reiterates these fundamental principles of the U.S federal securities laws and describes their applicability to a new paradigm – virtual organizations or capital raising entities that use distributed ledger or blockchain technology to facilitate capital raising and/or investment and the related offer and sale of securities. The automation or certain functions through this technology, “smart contracts,” or computer code, does not remove conduct from the purview of the U.S. federal securities laws.”