Hundreds Of Startups That Were Funded By ICO Violated Securities Law: SEC

In recent months, the US SEC has notably expanded its clampdown on ICOs which has put many ICO funded startups at risk, including many that were sure they did it the right way.

At the beginning of 2018, the SEC sent out a large number of initial information-seeking subpoenas. Now the financial regulators are getting back to those firms with many more subpoenas opened that focuses on those that failed to properly ensure they sold their token exclusively to accredited investors. The agency is exerting pressure on many of those companies to settle their cases. Many of the companies have quietly agreed to refund investor money and pay a fine.

According to conversations with more than 15 industry sources as part of a joint investigation by Yahoo Finance and Decrypt Media, many startups that have been subpoenaed say they are left in the dark struggling to satisfy the SEC’s demands and are uncertain of how others are handling it.

It is hard to say precisely how many ICOs occurred during the past four years. ICO Alert says it has tracked more than 5,000 but publicly reveals only 3,400 “legitimate” ones. CoinDesk lists only 800 in the past two years. More than $20 billion has been raised in ICOs to date, but the ICO boom peaked in January 2018. The central issue is the concerns over the legality of token sales.

Security Token Or Not

Many startups that did ICOs called their offering something else, such as a “utility token” or a “SAFT”, but the SEC does not care about those labels.

At a Senate hearing in February, SEC Chairman Jay Clayton said, “I believe every ICO I’ve seen is a security.”

Any U.S. company offering a security must register its offering with the SEC, or qualify for an exemption. Amid the ICO boom, virtually none have registered a security offering. Thus, they must meet an exemption. The SEC exceptions include selling only to investors outside the U.S. or selling only to accredited investors, which are individuals with income higher than $200,000 in each of the past two years or a minimum net worth of $1 million.

Many companies that thought they did properly limit their ICO to accredited investors are now finding out that in the eyes of the SEC, they didn’t.

When the SEC reaches out to companies that did an ICO, it is ordinarily through the company’s law firm. The SEC demands a large number of reports associated with the ICO. Yahoo Finance and Decrypt have acquired information that the law firm Cooley, which represented many ICOs, sent to one client after an SEC subpoena. The attorney letter warns,

“The SEC is likely examining whether [client] should be considered a security under the U.S. federal securities laws. For the purposes of this preservation hold, ‘document’ is defined very broadly.”


All of this SEC action may sound like very bad news for ICOs, but many in the industry have a more optimistic take: regulatory clarity will bring growth. In addition, more and more companies considering a token sale are now reaching out to the SEC proactively.

The looming lack of clarity has inspired a group of crypto companies, led by Ripple, to hire D.C. lobbyists to push Congress on behalf of the industry. From the SEC’s perspective, there is no lack of clarity. The sniff tests are the same as they have been for decades. The SEC is applying the same securities laws to ICOs that it always applies.

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