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Spoiler Alert: ICOs – The “Good Times” May Be Ending

November 20, 2017

In 2017, potentially the only area in finance hotter than Bitcoin and other cryptocurrencies has been ICOs (Initial Coin Offerings).  These offerings of blockchain based tokens have raised over $3 billion this year alone.

Regulators Are Paying Very Close Attention
For a long time, ICOs lived in a regulatory silence zone.  Some even boldly asserted that ICOs lived outside of government regulation.  In mid-summer the SEC fired its first “shot across the bow.”  While the SEC focused on the DAO token, its broader point was that tokens can be securities and, as a result, fall within the same regulatory regime as, for example, stocks.  The SEC did not state that all tokens are securities, rather that each offering must be judged independently under a facts-and-circumstances test based on criteria detailed by the Supreme Court in a ruling widely referred to as Howey.  The SEC ruling, however, left a great deal of uncertainty as to which tokens will be treated as securities and which will be viewed as “utility tokens” and therefore outside the regulatory reach of the SEC.

Since the SEC issued its ruling, other national regulatory authorities have spoken as well.  In extreme cases, countries such as China and South Korea have banned ICO’s entirely.   Others, such as Canada, the UK, Switzerland, Australia and most recently the EU, issued SEC-like guidance stressing that tokens may be securities and as a result, subject to the oversight of securities regulators.

Two recent events suggest that the “Wild West Period” for ICOs may be drawing to a close.   In an early November presentation before the Practicing Law Institute, SEC Chairman Jay Clayton reportedly deviated from his prepared remarks and stated: “I have yet to see an ICO that doesn’t have a sufficient number of hallmarks of a security.”

The Wall Street Journal further reported that, in a brief interview after his speech, “Mr. Clayton said  any ICOs resemble traditional stock offerings, with the only difference being the new fundraising tool involves tokens and distributed-ledger technology. ‘When you depart from the bitcoin or the ethereum, and you get into the tokens, the hallmarks become pretty clear,’ he said.”  Although Chairman Clayton made it clear that his remarks represented his personal views rather than formal SEC positions, it is difficult to view this as anything but a preview of the SEC’s approach.

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