In addition to its standard warnings about the generalized risks of ICO-investing and advice to interested ICO issuers that they read the SEC’s 2017 21(a) report, the agency’s latest guide to ICOs (initial coin offerings) gets more specific about the “fraud and manipulation” risks posed by ICOs, “because the markets for these assets are less regulated than traditional capital markets.”
The agency advises particular caution around cross-border ICO offerings, questions the notion that purported network “utility” exempts a token as a security, and reminds industry consultants, including lawyers, that they, too, are expected to protect “Main Street investors.”
Under the heading: “Tokens sold in ICOs can be called many things,” the SEC states:
“ICOs, or more specifically tokens, can be called a variety of names, but merely calling a token a “utility” token or structuring it to provide some utility does not prevent the token from being a security.”
Under the heading, “Products can be sold and traded internationally,” the SEC also warns about lack of recourse to America n investors if they buy tokens sold from jurisdictions outside the US:
“Recognize that these products are often sold on markets that span international borders and that significant trading may occur on systems and platforms outside the United States. Your invested funds may quickly travel overseas without your knowledge. Although the SEC actively enforces securities laws, risks can be amplified, including the risk that market regulators may not be able to effectively pursue bad actors or recover funds.
In addition to the usual warnings about “too good to be true” promises (outsized returns, for example), the agency also reminds investors to be wary of potentially misleading language in the industry:
“Many platforms for trading of digital assets refer to themselves as “exchanges,” which can give the misimpression to investors that they are regulated or meet the regulatory standards of a national securities exchange.”
The SEC also warns “digital asset” sellers that they should only tout their products if they know they are in full compliance with securities laws:
“Market participants should use caution when promoting or touting the offer and sale of coins without first determining whether the securities laws apply to those actions.”
Exchanges selling cryptos to US citizens, or seeking to, are also reminded to be, “aware that they may be operating unregistered exchanges or broker-dealers that are in violation of The Securities Exchange Act of 1934,” and are advised to register.
The latest ICO advisory also states: “The SEC protects investors, and expects you to.”
Industry consultants of various stripes are named in this section:
“Gatekeepers and others, including securities lawyers, accountants and consultants, should be guided by the principal motivation for the SEC’s registration, offering process and disclosure requirements: Investor protection and, in particular, the protection of Main Street investors.”