SEC ruled US Securities Laws might apply to ICO tokens

ICO tokens issuers now may face some obstacles, as SEC ruled US Securities Laws might apply to ICO tokens. How will the rules apply to the assets?

26 July, AtoZForex Initial Coin Offerings (ICOs) have been having quite a rally riding on the cryptocurrencies’ wave of popularity. The ICOs have raised millions of dollars, but all that might change right now. One of the key US financial regulators, the Securities and Exchange Commission (SEC) has ruled out that ICO tokens might be securities. Thus, they can be subject to federal securities laws.

SEC ruled US Securities Laws might apply to ICO tokens

In addition, the Decentralized Autonomous Organization (DAO) tokens were securities. They were issued back in 2016. The recent craze of ICOs has managed to raise millions of dollars. Some of the organizations have found out that ICOs are a very convenient way to raise money for development. They appeared to just approach investors while enjoying the hassle-free way of managing operations. All the obstacles of the traditional venture capital could be avoided.

In fact, there are no disclosure standards for investing in ICOs. The majority of investors consider ICOs a speculative asset. Their interest in ICOs comes from the fast appreciation in the price of the issued tokens. The “easiness” of making money with ICOs has resulted in the numerous unreliable operators. Exactly because of this, regulators decided to take an action.

Is DAO a security?

The SEC’s Enforcement Division has commenced an investigation into whether the DAO and linked entities were subject to securities law back at the time. The investigation ruled out that the DAO tokens were indeed a security. Moreover, the sale of these tokens was subject to the federal securities laws.

Even though the DAO was established as a crowdfunding contract, it did not meet the norms of the Regulation Crowdfunding exemption. It was a broker-dealer/funding portal with no registration. The Co-Director of the SEC’s Enforcement Division, Stephanie Avakian, has stated:

“The innovative technology behind these virtual transactions does not exempt securities offerings and trading platforms from the regulatory framework designed to protect investors and the integrity of the markets.”

The US SEC has decided not to file any charges in this case. However, it will use it as an opportunity to warn the industry and market participants about ICOs. The regulator states that securities laws are applicable to all entities that issue securities. This is irrespective of whether the entity is a traditional company or decentralized organization.

In addition, the SEC has published an investor bulletin, thus stressing the risks associated with ICOs.

Are ICO tokens securities?

As the SEC has concluded that DAO tokens were securities, now the question is raised for the ICO tokens. The regulator stated that the facts and circumstances of any investment transaction will decide whether the transaction is an offer of sale of a security.

Now, token issuers might have to ask for lawyers’ help in order to confirm that their tokens do not qualify as a security. In case it does qualify as one, then the compliance costs might outweigh the profits of raising money via ICO.

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