My Facebook Messenger was blowing up this afternoon. “OMG Have you seen this?” “What does this mean?” “Can you explain what this says in stupid people talk?”
They were all referring to today’s SEC announcement on ICOs. So, I’ll take 15 minutes from what was supposed to be “launch day” from my startup (Bootstrap Legal, give us some love) to break it down for ya’ll. And if you still have questions as to whether your ICO is a security (because not all are), this is the test.
TL;DR: The SEC is sending out a warning signal to the crypto world that yes, federal securities laws may apply if you take even a dollar (or btc… or eth) from U.S. investors. And by the way, the DAO was a security.
Let’s go paragraph by paragraph based on the SEC release:
1: Hey ICO community—we are warning you that U.S. securities laws might apply. When we say might, we mean just that—sometimes it does, sometimes it doesn’t. It depends on what exactly you’re doing. This is a fact-by-fact analysis.
2: We looked into The DAO. Federal securities laws totally applied in that case. So heads up—considering an ICO? Remember that you may need to follow the securities laws. And hey—for all you platforms out there that allow the trading of tokens, the laws apply to you, too. We’re not trying to spoil the party, but we regulate this stuff to protect investors and make sure that you’re transparent. (Hey, fraud happens!)
3: We’re still studying what effect ICOs will have on the capital markets. Because, you know, we care about innovative ways to raise capital too.
4: Ya’ll need to disclose all the risks of investment so that investors can make informed decisions.
5: Like we said—we looked into this whole DAO, ICO, blockchain business. The DAO folks tried to pass off what they were doing as a “crowdfunding contract” but guess what? Did it break securities laws and regulations? Yes. Yes it did.
6: (This is the quote of the day) Just because you cloaked this fundraising mechanism in technology doesn’t mean the securities laws doesn’t apply.
7: As tech evolves, you all have to remember the application of existing regulations.
8: Okay, chill out. We’re not going to punish anyone this time around, or formally say The DAO violated any laws. But we warned, we are letting all of you folks now that that securities laws exist, and they might apply to what you’re doing. (This is next part is also a key quote:) It doesn’t matter that you’re a decentralized autonomous company instead of a normal one; that you’re using cryptocurrency instead of straight up U.S. dollars; or that you use blockchain instead of paper stock certificates. If it walks like a duck and quacks like a duck, it’s a duck …err, a security.
9: We made a cool investor bulletin to educate ICO investors, because we want you to beware of fraud. And everyone else—check if securities laws apply, because if they do, the laws require that you disclose stuff and comply with investor protection laws. It also reminds investors to beware of fraud.
10: Shout outs to the investigation team.
So, there you go. Chill out, ya’ll. Nothing has changed—the laws that always applied still apply. The SEC is just making you very, very aware.
Just so you know, it doesn’t matter if you’re using blockchain or ether or bitcoin or whatever—the SEC doesn’t care about any of that. What it does care about is balancing investor protection and capital formation.
Please don’t hit me up asking if your situation is a security (I already get way too many messages and can’t keep up). Instead, read this. If it sounds like it might be a security, go talk to a securities attorney about your regulatory options (preferably one who actually knows what blockchain is and is familiar with the new crowdfunding rules). If it sounds like its not, well, you should double check anyway.
I keep getting questions for an example of one that’s probably not a security. Here is an example. See the difference? They’re not raising capital for their company or giving away equity. They’re just pre-selling coupons (more like kickstarter, less like raising from investors).
(Full disclosure: I may become an advisor to that ICO. Don’t put money in it just because I mentioned it.)
Amy Wan, Esq.CIPP/US, is a Senior Contributor to Crowdfund Insider. Amy is founder and Chief Legal Hacker at Bootstrap Legal, a Legaltech and Fintech startup that is a software service that automates the drafting of complex legal documents for smaller real estate projects. Amy was previously a Partner at Trowbridge Sidoti LLP (CrowdfundingLawyers.net) where she practiced crowdfunding and syndication law. Formerly, she was General Counsel at Patch of Land, a real estate marketplace lending platform. While there, Amy pioneered the industry’s first payment dependent note that is secured pursuant to an indenture trustee and designed to be bankruptcy remote, and advised the company on its Series A funding round. In recognition her work at Patch, she was named as a Finalist for the Corporate Counsel of the Year Award 2015 by LA Business Journal. Amy also brings extensive experience in legal innovation and rethinking the delivery of legal services. She is the founder and co-organizer of Legal Hackers LA, and was named one of ten women to watch in legal technology by the American Bar Association Journal in 2014.