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While all may seem quiet on the regulatory front, it could just be the calm before the storm. The US Securities and Exchange Commission is pursuing a broad investigation into ICOs, one in which numerous subpoenas and requests for information have been issued to a number of blockchain startups, according to The Wall Street Journal. The SEC apparently wants insight into the moving parts that comprise both the ICO and the pre-sale leading up to the public crowdsale.
The securities regulator has been ratcheting up its talk on ICOs that it says may be in violation of securities laws, and now they are taking action. The BTC price was off about 3% soon in the moments after the WSJ report came out.
ICOs are a multi-billion dollar market, with tallies for last year ranging from $5.6 billion to as high as $6.5 billion. 2018 has been off to a bang as well, with deals such as Telegram targeting billions of dollars. SEC Chairman Jay Clayton said earlier this month: “I believe every token I’ve seen is a security,” which should have sent chills up the spine of the founders of blockchain startups that chose to label their tokens a utility and not a security.
A utility token should have a specific application tied to the ecosystem for that token sale. For example, a gaming project whose tokens can be used to purchase virtual goods. But few “utility” tokens are actually limited to the applications they were meant for. When investors begin to speculate on the value of the token itself, that’s where the gray area surfaces, which worries regulators.
Deal Structure
In the subpoenas, the SEC is reportedly requesting information from issuers such as the “structure” of both token sales and ICO pre-sales, according to the Journal. While both ICOs and initial public offerings (IPOs) are fundraising methods, the former is much more loosely regulated. ICO issuers disclose a white paper, comprised of details for how that project sees the world, and having to register with regulators would slow down the fundraising process.
Meanwhile, cybersecurity consultant John Reed Stark, a former SEC official, presciently told Bloomberg earlier this month that in addition to the ICO issuing companies, attorneys advising those startups that are found to be in violation of securities laws were similarly at risk of being part of a regulatory “sweep,” one that he predicted would focus on the “low hanging fruit” to start.
Regulators previously “recommended enforcement actions against those that conduct initial coin offerings in violation of the federal securities laws,” according to the SEC. The SEC last year made it the job of a new crypto-focused task force to examine new digital tokens that come to market, and they’ve stopped or spooked more than a handful of them so far that they’ve made public.
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