SEC Cracks Down on ICO-Funded Start-Ups


The SEC is tightening the screws on projects that raised funds through the ICO route. Those in violation may have to refund the investors’ money or shut down.


U.S.-Based ICOs Under Scrutiny

In a crackdown on blockchain start-ups that raised funds through token sales, the SEC, the U.S. Securities and Exchange Commission, has asked those in violation to settle their cases.

At the start of the year, the regulator had sent information-seeking subpoenas to multiple firms. The agency has identified those firms that had sold tokens to non-accredited investors, which is in clear violation of the established norms. The SEC is now pushing them to refund investors’ money in addition to the payment of fines. Also, many more companies have been subpoenaed over the course of 2018.

A joint investigation was carried out by Decrypt Media in collaboration with Yahoo Finance. As part of the study, the team spoke to around 15 industry sources, including employees and attorneys of the impacted firms. The sources have not been named.

Are Tokens Securities?

ICO-based funding started in 2014 but picked up momentum in 2017 as a popular method of raising funds by blockchain projects. In an ICO sale, start-ups offer their native tokens in exchange for Bitcoin or Ethereum. These tokens can later be used on the platform that the firm intends to build or be traded on cryptocurrency exchanges.

Claiming that around $20 billion have been raised through ICOs to date, the investigative team says, “ICO Alert says it has tracked more than 5,000 but publicly displays only 3,400 ‘legitimate’ ones.” They, however, clarified that the exact number of ICOs conducted is difficult to find out.

The regulator has maintained that each ICO needs to be scrutinized by it to evaluate whether it falls under the category of securities or not. This, the SEC says, is irrespective of whether the ICOs call their offering a  “utility token” or a “SAFT“(Simple Agreement for Future Tokens).

The SEC’s Stand on ICOs

In July last year, the SEC made a formal announcement regarding the ICO sale conducted by DAO through which the firm raised $150 million in 2016. The regulator had concluded that DAO tokens were securities. At a Senate hearing in February, SEC Chairman Jay Clayton said, “I believe every ICO I’ve seen is a security.”

William Hinman, the SEC’s director of corporation finance, had said in June at Yahoo Finance’s All Markets Summit that most ICOs are securities offerings and that “calling the transaction an initial coin offering, or ‘ICO,’ or a sale of a ‘token,’ will not take it out of the purview of the U.S. securities laws.”  He had clarified that Ether did not classify as a security.

SEC

According to regulations, any U.S.-based firm offering securities needs to register its offering with the SEC or seek an exemption. Most of the start-ups that held ICOs had not disclosed as required. An exemption includes selling to investors outside of the country or selling only to accredited investors (individuals with income higher than $200,000 in each of the past two years or a minimum net worth of $1 million).

Some of the firms against whom the SEC has acted include Munchee, AriseBank, and Centra (ICOs of these firms were shut down). Many impacted firms have had to refund the investors’ money while others are negotiating to work out a solution.

In the absence of regulations specifically for cryptocurrencies, the start-ups do face a business risk as they continue to be evaluated against existing norms applicable to financial instruments like stocks and bonds.

What do you think will be the impact of the SEC crackdown on ICOs? Let us know in the comments below.


Images courtesy of Shutterstock.

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