SEC Chairman Issues Statement on Cryptocurrencies and Initial Coin Offerings
The developing cannabis industry is constantly dealing with payment and finance issues as a result of cannabis remaining a controlled substance under federal law. One solution that has frequently been discussed is the use of virtual currency, such as Bitcoin, or other custom digital “coins” that may be sold through Initial Coin Offerings (ICOs). Yesterday, SEC Chairman Jay Clayton released a statement on cryptocurrencies and ICOs.
The statement provides a number of considerations to market participants, reminding that any ICO that involves an offering of securities must comply with the securities laws. The statement is carefully worded to not call every ICO necessarily a securities offering, but then makes clear that the substance of the transaction is what controls whether a “coin” is actually a security. The statement goes on to lay out features to look for in determining whether or not a particular cryptocurrency is actually a security.
The statement also acts as a reminder that not only do the registration requirements apply to sales of securities, but all of the accompanying SEC regulations regarding the sale and marketing of securities. Selling securities generally requires a license, so promoting a cryptocurrency that is really a security risks non-compliance with broker registration laws, among other things.
In another recent post, we noted a sharp decline in SEC enforcement activity against public companies. Yesterday’s statement gives one clue as to where the SEC is turning its focus: Chairman Clayton has “asked the SEC’s Division of Enforcement to continue to police this area vigorously and recommend enforcement actions against those that conduct initial coin offerings in violation of the federal securities laws.”
In short, anyone considering getting into the ICO market should consult securities counsel before proceeding.