Is operating a Bitcoin security subject to SEC regulation in the USA?

[CoinHoarder]

Since the government is starting to treat Bitcoin as being more legitimate, I have been of the opinion that Bitcoin securities are likely subject to having to register with the SEC to operate legally. A government press release from the Texas Securities Commisioner caught my eye the other day that makes it seem like maybe not. I'm not sure if I'm reading into it too much, but I would like some opinions. It seems like the Press Release is talking about Bitcoin as a security, but if Bitcoin itself is not subject to "traditional regulation or monetary policy", then Bitcoin denominated securities would likely not be subject to those regulations and policies either, right?

My emphasis is in bold. Link to press release: http://www.ssb.state.tx.us/News/Press_Release/02-25-14_press.php

"TEXAS SECURITIES COMMISSIONER WARNS ABOUT RISKS ASSOCIATED WITH INVESTMENTS TIED TO DIGITAL CURRENCIES

AUSTIN, Texas – In the wake of recent turmoil in the market for Bitcoins, Texas Securities Commissioner John Morgan today urged investors to consider investment risks associated with digital currencies.

“Although digital currencies such as Bitcoin are often touted as a sophisticated, online alternative to traditional currencies, investors shoud realize these curriencies are not tangible, they are not issued by a government, and are not currently subject to traditional regulation or monetary policy,” Morgan said.

Digital currencies are essentially long lines of computer code that may be encrypted and sent or received without involving a financial institution or government agency, Morgan said. “In many ways, digital currencies operate as ‘online cash,’ only this type of currency is extremely volatile and can disappear the same way your money disappears when you lose your wallet.”

Bitcoin, a specific type of digital currency, has recently garnered widespread attention due to fluctuations in its reported value and its increasing acceptance in electronic commerce. Although Bitcoin and other digital currencies are becoming more popular, they present significant risks when part of a securities offering.  These risks include the following:

  -  Questionable security of the exchanges dealing in Bitcoins and other digital currencies, highlighted by Mt. Gox, the Japan-based Bitcoin exchange that apparently ceased operations Feb. 24. A reported series of security breaches at Mt. Gox may have caused the loss of 6% of the Bitcoins of circulation.
  -  Digital currencies may be highly volatile, and their value can dramatically rise or fall in a relatively short period of time. These considerable fluctuations in value may present significant risks when investment programs are tied to demand for digital currencies or the price of digital currencies. Accordingly, investment programs associated with digital currencies may not be suitable for many investors, especially those prioritizing safety and security or planning for retirement.
  -  Digital currencies exist only on computers and are almost always used as part of transactions that are effectuated through cyberspace. The electronic nature of digital currencies may provide fertile ground for hackers, who may be able to remotely compromise computer security systems and effectively steal digital currencies. Investors are therefore highly reliant upon their own computer security systems, as well as those provided by other parties, to protect investment programs tied to digital currencies.
 -  Digital currencies may provide promoters with a significant degree of anonymity.  Unscrupulous promoters may be able to exploit the anonymous nature of certain digital currencies to conceal their true identity and assist in the concealment and laundering of the proceeds of a fraudulent investment offering.
 -  Securities offerings that incorporate digital currencies may be highly dependent upon their growth and acceptance in retail and commercial marketplaces.  Also, any change in consumer confidence, user demographic or governmental regulation, or the introduction of new and competing forms of digital currencies, may negatively affect the liquidity or value of such securities offerings."

[repentance]

The SEC’s complaint charges Shavers and BTCST with offering and selling investments in violation of the anti-fraud and registration provisions of the securities laws, specifically Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5.  The SEC is seeking a court order to freeze the assets of Shavers and BTCST in addition to other relief, including permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.

https://www.sec.gov/servlet/Satellite/News/PressRelease/Detail/PressRelease/1370539730583#.UxJ1buOZuSf

pirate operated out of Texas.  Among the charges he was slapped with by the SEC were charges related to securities registration.

Be careful about reading what you wish to be the case into press statements by regulators.  When they say that something isn't subject to traditional regulations/policies, what they normally mean is that "investors" don't have the same legal protections which would be afforded buyers of registered securities.  They don't mean that the offering of those securities doesn't contravene any laws.

From the actual complaint against Trendon Shavers (bolding mine)

42. Defendants, directly or indirectly, singly or in concert, have made use of the means or instruments of transportation or communication in interstate commerce, or the mails, to offer and sell securities when no registration statements was filed or in effect as to such securities and when no exemption from registration was applicable.

43. By reason of the foregoing, Defendants have violated and, unless enjoined, will again violate Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a) and 77e(c).]

http://www.sec.gov/litigation/complaints/2013/comp-pr2013-132.pdf

In plain English, pirate committed an offence against federal securities laws by selling securities which were neither registered nor exempted from registration.

[odolvlobo]

Since the government is starting to treat Bitcoin as being more legitimate, I have been of the opinion that Bitcoin securities are likely subject to having to register with the SEC to operate legally. A government press release from the Texas Securities Commisioner caught my eye the other day that makes it seem like maybe not. I'm not sure if I'm reading into it too much, but I would like some opinions. It seems like the Press Release is talking about Bitcoin as a security, but if Bitcoin itself is not subject to "traditional regulation or monetary policy", then Bitcoin denominated securities would likely not be subject to those regulations and policies either, right?

If by "Bitcoin security", you mean a security traded on an exchange denominated in bitcoins, then I don't think text you quoted is applicable. It is talking about a security whose value is based on bitcoins or derivatives of those securities, and it is warning against the value and legal standing of the bitcoins themselves.

Here is the definition of a security:

SECURITIES ACT OF 1933
SEC. 2. (a) DEFINITIONS.—When used in this title, unless the context otherwise requires—
(1) The term ‘‘security’’ means 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, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a ‘‘security’’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

I think "transferable share" and "in general, any interest or instrument commonly known as a 'security'’’ apply to most Bitcoin securities.

[Nagle]

There's a classic case on this - SEC vs. Howey. Read the Wikipedia writeup and the Howey test.

For the Too Dumb, Didn't Read crowd: if it works like an investment in some kind of potentially profit-making business, the SEC can regulate it.

[CoinHoarder]

Thanks for the clarification. This pretty much confirms my original opinion on the matter. I think I was trying to read too much into that press release. It will be interesting to see if the SEC does anything in the next year or two about this. There are some large Bitcoin/Litecoin securities ran out of the USA.

I wish this wasn't the case though.. I have a couple business ideas that would take the likes of an IPO to get off the ground. It kind of sucks that people from other countries can pretty much start a Bitcoin security no problem. I would be scared to do so in the USA because of uncle Sam. The government is really holding back Bitcoin at this point with all the regulations.

[Nagle]

Thanks for the clarification. This pretty much confirms my original opinion on the matter. I think I was trying to read too much into that press release. It will be interesting to see if the SEC does anything in the next year or two about this. There are some large Bitcoin/Litecoin securities ran out of the USA.

I wish this wasn't the case though.. I have a couple business ideas that would take the likes of an IPO to get off the ground. It kind of sucks that people from other countries can pretty much start a Bitcoin security no problem. I would be scared to do so in the USA because of uncle Sam. The government is really holding back Bitcoin at this point with all the regulations.

What usually happens is that some unregistered security crashes, investors get mad and contact the SEC, and the SEC has the Justice Department prosecute the people behind the security. Here's the SEC's list of recent litigation actions.

About once a day, the SEC drops the hammer on some get-rich-quick scheme that turned out to be a ripoff. In the last week:

* InfraAegis - claimed to have Homeland Security contracts for "radiation-detection kiosks". They didn't. Investors lost big.
* Robert Custis - Ponzi scheme, investors didn't get paid.
* Good Life Financial Group -  "fraudulently misappropriated and converted investors' funds for his personal use to pay previous investors, to purchase a house and car and to pay his daughter's tuition and other personal and business expenses."
* Kevin O'Brien - broker who stole customer funds.

Look familiar? Each type of scam above has been seen in the Bitcoin world. Same old investment frauds. Same regulations apply. The government is not "holding Bitcoin back".

[repentance]

I wish this wasn't the case though.. I have a couple business ideas that would take the likes of an IPO to get off the ground. It kind of sucks that people from other countries can pretty much start a Bitcoin security no problem. I would be scared to do so in the USA because of uncle Sam. The government is really holding back Bitcoin at this point with all the regulations.

My understanding is that the US government is looking at the whole issue of crowd funding, so for smallish enterprises not looking to raise large amounts of capital that might provide some options.

I'm not a huge fan of "start-ups" with no business experience and no backers being able to go the IPO route straight off - I think there's a need for an intermediate alternative which allows those seeking smallish amounts of capital to raise funds from the public while forcing them to constantly remind their "investors" that the venture is very high risk and there's a good likelihood they'll see no return.

[Nagle]

I wish this wasn't the case though.. I have a couple business ideas that would take the likes of an IPO to get off the ground. It kind of sucks that people from other countries can pretty much start a Bitcoin security no problem. I would be scared to do so in the USA because of uncle Sam. The government is really holding back Bitcoin at this point with all the regulations.

My understanding is that the US government is looking at the whole issue of crowd funding, so for smallish enterprises not looking to raise large amounts of capital that might provide some options.

I'm not a huge fan of "start-ups" with no business experience and no backers being able to go the IPO route straight off - I think there's a need for an intermediate alternative which allows those seeking smallish amounts of capital to raise funds from the public while forcing them to constantly remind their "investors" that the venture is very high risk and there's a good likelihood they'll see no return.

The new "IPO Lite" rules are still being set up. Comments are open until March 24th. This is for startups that need more than $1 million or so but less than $50 million.  It's a bad sign that some of the enthusiasm for this is coming from south Florida, historically the scam center of the US. Also, some of the people pushing this want to do IPOs for real estate trusts. Others want to be able to IPO a shell company (one with no assets or operations.) It's not something that seems to be a big deal to Silicon Valley. There's enough venture capital available to get startups to the point where they either go public or go under.

[repentance]

There's enough venture capital available to get startups to the point where they either go public or go under.

Not everyone with a business idea wants their company to eventually go public, of course. 

Not to mention that "ideas guys" on the one hand tend to be very difficult to deal with when it comes to business realities (not realising that the right deal with a VC brings more than money to the table and that owning 60% of a successful business is better than owning 100% of a business which fails largely due to the founder's ego), but are definitely also quite vulnerable when it comes to playing with the big boys because they don't have the money to get expert professional advice before committing themselves to funding deals.