Initial Coin Offerings are coming under the Purview of the SEC: What’s Next?
ICO Tokens – Under the Purview of the SEC Rulings
While the cryptocurrency industry has grown and there are thousands of ICOs out there, it is also important to be cognizant of current state of the industry. That is to say, the Securities and Exchange Commission is becoming more and more aware of the classification of ICOs and is starting to consider classifying them as a “security.”
Classification as a security has dozens of implications, one of the most important being that the ICO is subject to dozens of rules and regulations. Meaning, such rules and regulations address how many ICOs can be sold, who can sell them, whether they need to be registered, and the protections that must be in place for buyers as well.
What Is A Security?
The definition of a “security” is extremely broad. This means that more things can be classified as a security and therefore, are subject to certain rule and regulations.
Section 2(a)(1) of the Securities Act classifies a security as:
any note, stock treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option or privilege on any security, certificate of deposit . . .
As users can tell, the definition is truly broad and further, even interests or items that are not included in the comprehensive definition of a security as defined by Section 2(a)(1) may be a security.
Is The ICO A Security – Apply The Howey Test
If the interest does not fall into the above definition, then it still may be classified as a security by meeting the Howey test. The Howey Test arises from a 1946 legal case that determined that cultivation of vast acres of citrus is a security because it is an “investment contract.” Those who invest in ICOs can determine whether it is a security by assessing the following factors of Howey:
- Is there an investment of money?
- Is there an expectation of profits?
- Does the investment arise from a common enterprise?
- Does any profit come from the efforts of a promoter or third party?
At the end of the day, it seems that many ICOs do fall under the following condition. The holding of the case determined that, “if the test can be satisfied, it is immaterial whether the enterprise is speculative or non-speculative, or whether there is a sale of property with or without intrinsic value.” Essentially, if one is investing and is planning on earning a profit, then it is a security.
The SEC’s Position
According to the SEC, many initial coin offerings are a method for raising capital and for cultivating investment opportunities. The digital assets are therefore securities and must meet certain rules and regulations. Failure to do so can have serious implications not only for the buyer of the ICO but also the selling company as well. The best thing to do at this point is to consistently track the SEC’s position concerning ICOs and to review the status of the specific ICO that one is interested in.
We have two new pieces coming out in which you can find here “Are Cryptocurrencies Securities” and here “The Howey Test and Cryptocurrencies” which go much more indepth about the SEC, Howey Test, and the upcoming ICO token security classifications and rulings.