ICO – Crypto Conjecture

The most recent actions by the Securities Exchange Commission (SEC) demonstrate that it is time for projects and companies to rethink those carefully worded conclusions that considered their ICO and digital asset trading activities to be outside of SEC regulation or enforcement actions. And even for entities that are just transacting with companies at risk, it is time to raise the bar on the due diligence scrutiny.

1_lid5NoZ7sPS8OMfoMNy6_Q Two weeks ago (on 11/16/2018), the SEC released a Statement on Digital Asset Securities Issuance and Trading that briefly outlines the most recent enforcement activity in the space, as well as sets the tone for further actions to come. The statement focuses on the Commission’s Division of Corporation Finance actions involving AirFox, Paragon, Crypto Asset Management, TokenLot, and the well-publicized settlement of charges by the SEC against Zachary Coburn, founder of EtherDelta.

All of these actions focus primarily on the premise that the SEC considers (almost) all cryptocurrencies or tokens to be securities under the Federal Laws. This interpretation was first made public when the SEC issued the DAO Report (July 2017) and was later confirmed by the Munchee Order (Dec 2017).

Then in Feb 2018, Jay Clayton (SEC Chairman) declared at a United States Senate hearing: “I believe every ICO I’ve seen is a security”. A few months later, Willian Hinman (Director of SEC’s Division of Corporation Finance) also confirms the same interpretation in connection with ICOs and related activities.

The last public announcement from the SEC was made again by Jay Clayton just yesterday, during the Consensus: Invest conference in Manhattan, New York. Among other things, he stated: “If you finance a venture with a token offering, you should start with the assumption that it is a security.”.

There are still a number of open investigations and charges will continue to be issued. The SEC has been overemphasizing the concept of the functional approach (that takes into account the relevant facts and circumstances) when assessing whether (i) a digital asset is a security; (ii) a system constitutes an exchange; or (iii) an entity meets the definition of a broker or dealer, in all three cases regardless of how an entity may characterize either itself or the particular activities or technology used to provide the services.

With this functional approach, the SEC’s intended message is really: ‘if it quacks like a duck, come talk to us, or we will come talk to you soon enough’. Or, in the actual words of the SEC: “These two matters demonstrate that there is a path to compliance with the federal securities laws going forward, even where issuers have conducted an illegal unregistered offering of digital asset securities.”

Therefore, at this point, considering how things have evolved, if you are (already or about to get) involved in an ICO or related activity, or even in a transaction with a company involved in that space, you should really make sure that you or your counterpart are on the safe side of this discussion.

The good news: the regulated avenue is probably sufficiently wide for most projects, especially if one decides to use all possible lanes. With the simultaneous use of different exempted issuances (commonly referred to as Regulation D, Regulation A+, Regulation S, just to name a few), it is possible to safely raise considerable amounts of capital from a reasonably vast number of individuals. Yes, restrictions apply. But in the current days, it is becoming more and more clear that it is better to ask for permission than for forgiveness.

Finally, from what I have seen with a variety of projects, it seems that legal fees and regulatory burden are going to be significantly reduced if companies decide to walk hand in hand with the SEC.

Keep an open eye…

“Have we earned it?” – probably the most important question posed in 2017 in the cryptocurrency community was this one by Vitalik Buterin, the founder of Ethereum.

In December 2017, the much celebrated 23-year-old Russian-Canadian posted the following on Twitter:

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There were many other tweets and explanations given later but, with that opening thought, he was able to encapsulate in a very concise and elegant manner a general feeling that currently permeates the cryptocurrency ecosystem: people are focusing much more on the wealth generated by the extreme valuation of coins than on delivering on the promises of real change and disruption that we have been hearing and/or propagating in recent years.

In Vitalik’s words: “how many unbanked people have we banked? How much value is stored in smart contracts that actually do anything interesting? How many Venezuelans have actually been protected by us from hyperinflation?”

Throughout 2017, many cryptocurrencies had stratospheric valuations, making a lot of early investors sudden millionaires. And, to be fair, this kind of story makes the media headlines a lot more often than, for example, the current efforts of replacing a century old finance industry with blockchain technology. The media frenzy over crypto valuation, predictions about the future and overnight millionaires have occupied much of the space last year.

The vast majority of people (many of whom investing in crypto) still have not fully understood the importance of the blockchain concept and its true potential. Moreover, many do not even care – as long as whatever coin they bought yesterday continue to increase in price, that is all that matter.

Jeremy Gardner, another major player in the crypto community, made a similar point in his great keynote last week (Jan 19), at The North American Bitcoin Conference, in Miami.

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Gardner criticized the current focus on wealth that is so pervasive nowadays in the crypto community reminding the audience of the days when our parents dropped the protest sign on Wall Street to embrace instead corporate suits and pension plans, and urging the crowd to avoid going down that same path.

The ongoing blockchain revolution has deep social change roots and many in the community are in fact committed to doing something for the common good, irrespective of making money along the way. But their efforts have been shadowed by a growing number of investors/curious whose only focus is on making money fast without any regard to what is the effort about.

In other words, there is still a long way to go before cryptocurrencies will play a major role in society. There are a number of ensuing initiatives that will soon surely flourish but a lot more needs to be done.

One obstacle might be that a lot of the talented people capable of overcoming the challenges in the crypto world is presently devoted to ICOs (Initial Coin Offerings).

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While ICOs are a legitimate way of raising funds for startups, some argue the model is being abused and used for projects that are either nonsense or would not need to be involved in the crypto space. It is an interesting thought but I will leave that for a future post.

Tag: ICO

It is no longer safe to be in the ICO arena without the blessing of the SEC

Have we earned it?

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