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Posted on 11/22/2017 at 12:00 AM by Laura Wasson
At Practicing Law Institute’s Institute on Securities Regulation in New York earlier this month, Securities and Exchange Commission (“SEC”) Chairman Jay Clayton went “off-script,” commenting that he has yet to see that an Initial Coin Offering (“ICO”) doesn’t have the hallmarks of being a sale of securities. Though Chairman Clayton qualified that this opinion was personal and did not necessarily reflect the opinion of the SEC, his remarks did not go unnoticed. In the two days following his comments, the value of Bitcoin dropped by approximately 20%.
If the Chariman’s comments are a glimpse into the future of securities laws, their impact would be significant. To date, it is estimated that over $1 billion has been raised by ICOs, making them a substantial portion of capital markets. If the coins are considered securities in the future, the market will shift in a variety of ways.
For example, some issuers may register the securities, which is costly and time-consuming and may ultimately slow the popularity of ICOs. Others may change the way they structure the ICO to avoid the SEC altogether. In fact, some ICO participants have already started doing this by restricting their offerings to accredited investors, thereby assuming the SEC may consider the coins' securities and structuring their offering as a private placement exempt from registration anyway. For companies who continue to issue new coins, this may be the most conservative practice while the SEC weighs its options.
For investors participating in ICOs, it’s important to remember that lack of SEC oversight may also mean more risk. SEC regulations require issuers to disclose certain information to potential investors and also give investors methods of recovery against issuers who act fraudulently. Though this risk is mitigated by the availability of common law remedies, such as fraud and breach of contract, it should still be considered.
The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.
- Laura Wasson