Statement on Cryptocurrencies and Initial Coin Offerings
sec.gov
sec.gov
> We at the SEC are committed to promoting capital formation. The technology on which cryptocurrencies and ICOs are based may prove to be disruptive, transformative and efficiency enhancing. I am confident that developments in fintech will help facilitate capital formation and provide promising investment opportunities for institutional and Main Street investors alike. I encourage Main Street investors to be open to these opportunities, but to ask good questions, demand clear answers and apply good common sense when doing so.
I don't know much about Jay Clayton (SEC Chairmain) but he seems to be taking a very pragmatic stance on tokens. From what I gather, he's saying that some of these tokens should be classified as securities, while others should not. And we as investors should be be diligent to probe the creators to see if these tokens are subject to regulation and are legal.
This is amazing! The SEC haven't quite stepped in yet. But I fully expect them to. And this gives some great insight into what we can expect in the future.
This is a space that will grow in the coming years, and while there will be growing pains / abuses along the way, this might end up being a new, valid and accepted method of raising international funding.
All the actors just need to get comfortable with this and figure out the best way to approach this.
As a long time crypto investor, even i recognise that ico's are out of control. It is my opinion that if you can't mine it yourself, or get someone independent from the issuer to do it for you, it's a security in everything but name. Any presale token is simply a security towards the coins once released. I can't see how that isn't a security.
The lines become much more blurred when you’re talking about a staked currency where an ICO is necessary to help evenly distribute the coins which are then mined. Honestly, as annoying as this is, the definition is security is so broad that I find it hard to picture any cryptocurrency not being defined as a security.
You could, for example clone Bitcoin exactly, but make a change where you recieve a billion free coins. It would be dumb, but that wouldn't be a security.
The problem is when ICOs premine and sell you a token for something that doesn't already exist yet. The token represents a future promise, as opposed to something that exist right NOW.
The issue is when A) people buying the token are doing so because they expect the value to increase, and/or B) the value of the network comes from a central party or promoter rather than from the network participants. If a currency is pre-mined, then it's more likely to be a security because the network participants aren't helping to secure the network. Similarly, if the product doesn't yet exist, then it's more likely to be a security because the network participants are unlikely to be creating value.
The fact that the token may be pre-mined or the product may not yet exist doesn't inherently matter except to the extent that they make it much more likely the token fails conditions A and B.
Similarly, if Ethereum goes to proof-of-stake then it's more likely to be considered a security, but there isn't a specific law saying that proof-of-stake tokens are illegal.
Any valuable thing that isn't a commodity, is a security. Every fiat currency is a security. Stocks and bonds are securities. Etc. The government can regulate securities (or rather, regulate their issuers, because there is a clear issuer), and so they do.
The definition of security isn't really vague; it's just a definition of exclusion. Replace security with "non-commidty" whenever it comes up and things might be clearer.
Gold ownership was outlawed in the US in 1933 by FDR.
https://en.wikipedia.org/wiki/Executive_Order_6102
EDIT: "The limitation on gold ownership in the U.S. was repealed after President Gerald Ford signed a bill to "permit United States citizens to purchase, hold, sell, or otherwise deal with gold in the United States or abroad" with an act of Congress codified in Pub.L. 93–373,[19][20][21] which went into effect December 31, 1974."
That's not quite right.
You could say that WoW Gold is "premined". You can't "mine" it yourself, and it's only issued by World of Warcraft.
Same thing with Walmart gift cards and Disney Dollars.
Call it money, or tokens, or scrip, but it's not a security.
If you sell it to users primarialy to transact with it, it's probably not a security.
If you sell it to fund the development of the enterprise, and buyers expect to profit from that enterprise, then it probably is a security.
Maybe I am just being pedantic, but it seems most tokens could make an argument that they are products just by the fact that they build a brand and may have a technology that differentiates them from others. I have little hands-on financial experience but the terms of abstraction by which we define what a currency consists of seems like a philosophical topic to me. I am curious how this gets resolved.
It seems cryptocurrency may offer the puzzle piece which illustrates this spectrum of abstraction to a degree which is truly painful. A year ago, I had no idea what a security is, and after reading about them for a year, I am doubting that they exist as a logically defined objective category. Like many things in finance, the concept of these securities appears to be a relative conjurement, dependent not on logical definitions but on contextual gaps of unimaginable forms of abstraction. As cryptocurrency implements the unimaginable, those gaps are filling. We will eventually face a continuum of abstraction limited to philosophies of material.
I tried to read the linked release, got about 1/5 of the way down it and was just incredibly bored. I hate to sound so lazy and will try to read it again later.
If the thing you are buying has only its intrinsic value, then it is a commodity.
An example would be a baseball card (intrinsic value only) vs. a card that entitled you to some fraction of that baseball player's future income over the course of their career. The latter isn't really something that exists, although it probably could, but if it existed it would probably be some type of security.
I think i have an idea for a new ico....
Call it : sportico!
"A change in the structure of a securities offering does not change the fundamental point that when a security is being offered, our securities laws must be followed"
They're saying it's fantastic, just do it legally. And for any offering that passes the Howey Test, that means registering with the SEC.
Accredited investors must make 200 to 300k annual (dual income allowed) and/or have 5 mill in tied up assets and/or a net worth of over 1 mill.
For every millionaire out there who is investing in crypto, there are a few hundred people who just want to buy things off the dark web.
Gotta love the unlimited supply of optimism in the cryptocurrency world. Every single existing token is either a security or a commodity, but people still think they can squeeze through the "utility token" loophole.
My optimism could totally be misplaced! But here's an excerpt from the SEC statement that seems to go beyond your "security or commodity" classification.
> A key question for all ICO market participants: “Is the coin or token a security?” As securities law practitioners know well, the answer depends on the facts. For example, a token that represents a participation interest in a book-of-the-month club may not implicate our securities laws, and may well be an efficient way for the club’s operators to fund the future acquisition of books and facilitate the distribution of those books to token holders.
It becomes a lot easier when you realize money isn't real, it's a constraint. Like oxygen, it only matters when you don't have it --- once you do, it becomes irrelevant -- a story that allows you to represent incentives to do positive deeds.
> By and large, the structures of initial coin offerings that I have seen promoted involve the offer and sale of securities and directly implicate the securities registration requirements and other investor protection provisions of our federal securities laws.
Basically, almost all ICOs so far are illegal. He says that it's possible to make an ICO that isn't illegal by following SEC rules, but I would be surprised if a single existing ICO actually qualified because most of the benefit of doing an ICO comes from not complying with the regulations.
Not a simple question, I guess.
Examples? Is Goldman playing in the current bubble?
Why do you think the SEC should be arbitrators of what and what is not dumb money?
They are only illegal in the US if they allow US citizens to participate, and the majority ban US citizens. So I think you have it backward.
Then the company can fairly legitimately say "The customer lied to us about their citizenship. We took all reasonable measures to determine their citizenship, because there isn't a freely available database of which people have which citizenships"
Are you sure your country doesn't?
My country has a list of things that are securities written into the law. Until they write in there crypto tokens they are not securities.
https://www.cryptocoinsnews.com/filecoin-ico-raises-record-2...
The SEC commissioner said that no ICO has registered as a security so far. Given that Filecoin was one of the only ICOs to openly advertise themselves as being a security, it seems like they could be in even more legal trouble than everyone else.
a lot of them are offering to sell you an asset that they advertise as being sure to appreciate, with the subtext that you will sell the asset at a later point for a gain. Selling something purely to be a store of value and appreciation is basically the textbook definition of a security, isn't it?
It's guaranteed scarcity. By design. All you have to add to that formula is the idea that there's a demand. And that's what every ICO is: hype about demand for a decreasingly available thing.
Once you have been sold that there's a demand, the appreciation is guaranteed by definition of what it is.
Please avoid making generalized statements, especially ones that are flat out wrong.
any note, stock, treasury stock, security future, 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 (including a certificate of deposit) or on any 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. [1]
EDIT: The Supreme Court's "Howey Test" [2], which came out of a 1946 case over complex real-estate leaseback deals, is in some respects a simpler method to determine whether something may be a investment contract, which is a security:
1. It is an investment of money
2. There is an expectation of profits from the investment
3. The investment of money is in a common enterprise
4. Any profit comes from the efforts of a promoter or third party
[1] That's from the Investment Company Act of 1940, which seems to be definitional; there are some other definitions used elsewhere in the UCC and other Federal laws (largely from 1934), but they seem to be similar, and quite a few places punt to this definition. (Quoted in http://apps.americanbar.org/buslaw/newsletter/0014/materials... which is an annoyingly "locked" PDF that you will need to de-DRM; this is left as an exercise to the reader.)
[2] http://consumer.findlaw.com/securities-law/what-is-the-howey...
https://coincenter.org/entry/reporting-back-from-the-blockch...
------------
Using the "Howey Test" on Bitcoin you find that Bitcoin and almost all other cryptocurrencies should be considered securities.
1. It is an investment of money 2. There is an expectation of profits from the investment 3. The investment of money is in a common enterprise 4. Any profit comes from the efforts of a promoter or third party.
any note, stock, treasury stock, security future, 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 (including a certificate of deposit) or on any 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. [1]
A tulip can be speculative, but it's not a security. A non-transferable share of stock is a security but it's not speculative.
A share of stock in a publicly traded company is a legally recognized right to the earnings/assets of the company. Of course, the company may choose to distribute the earnings, or reinvest them for greater future earnings/assets. However, all ICOs I've seen so far bestow no legal right to $$ denominated earnings/assets of any sort.
So an ICO to purchase a cashflowing asset (e.g. an apartment building) gives the owner of the token ZERO legal right to claim any of the cash from the rent collected or proceeds from a sale of the apartment building. However, the owners of stock in the corporation that purchased the building definitely have legal rights to the cashflow/proceeds from sale etc, even if their purchase was facilitated by the sale of virtual tokens. They have no legal obligation to pay the token holders anything whatsoever.
This is an over-simplified example to drive the point home.
Right now the crypto space is like the entry point of an MMORPG. Picture a bunch of dollars entering and then walking around and trying things. "What do I do here?" "How do I play?"
Obviously it's bubbly but that's not the point. The point is that all this new money entering the crypto space is looking for something to do.
Putting out an ICO will attract some of it. It is not accessible in any other way.
... and unfortunately ICOs and crypto have sucked a lot of the air out of conventional crowdfunding, equity crowdfunding, and small time angel investing. So crypto is where the money is and you have to go crypto to reach it.
It's dumb but markets are not rational.
If by 'some' you mean that some future tokens might be able to be offered for sale legally, then yes. But he also just declared basically 100% existing token operations to be criminal.
It seems obvious that ICOs should be treated as the sale of securities- its somewhat reassuring to see the SEC endorsing this view.
In my view, the biggest issue that we currently have is that SEC is not going after attorneys and accountants who are facilitating these schemes. Do note that I'm not talking about a company performing ICO hiring a law firm to do it correctly, crossing the Ts and dotting the Is. What I'm talking is SchmoeCo going to a law firm specializing in ICOs ( sidebar: can you even believe that there are now law firms that specialize in ICOs?! ) basically disclosing that their ICO is a gigantic fraud scheme and those law firms and accountants help them to pull off this scheme, often for a percentage of the money raised.
Going after those firms will relegate the ICO scams and frauds to the pink sheet pump and dump scheme level while letting the legitimate companies to use ICOs to raise money for legitimate even if very speculative projects.
That, sadly, isn't usually possible either, unless you were implying that a lawyer or team of lawyers would be the person or persons doing the reading. Tho it's still better than being "forced to read tea leaves in the enforcer's statements".
Why not? Isn't that the story of many wildly successful SV startups?
Once they're regulated as the securities they are, what advantage do ICO's have?
I'm not sure this argument is as strong as you seem to think it is.
... and fools and frauds during an intense phase of greatest hype, FOMO (fear of missing out), pump and dump etc.
What a great move by the SEC. I think Ethereum, as a vehicle for many/most ICOs, owes it to the community to embrace this list and create a standard disclosure form that encourages new ICOs to answer these. And if Ethereum offers an index of tokens somewhere (I'm not familiar w/Ethereum's details), it could indicate which ones answered some/all of the questions in the form.
BTW industry/trade groups is how lots of businesses avoid regulation. Entertainment industry especially; e.g. ratings and content guidelines from MPAA/ESRB/Comic Code.
> "Following the issuance of the 21(a) Report, certain market professionals have attempted to highlight utility characteristics of their proposed initial coin offerings in an effort to claim that their proposed tokens or coins are not securities. Many of these assertions appear to elevate form over substance. Merely calling a token a “utility” token or structuring it to provide some utility does not prevent the token from being a security."
> By and large, the structures of initial coin offerings that I have seen promoted involve the offer and sale of securities and directly implicate the securities registration requirements and other investor protection provisions of our federal securities laws. Generally speaking, these laws provide that investors deserve to know what they are investing in and the relevant risks involved. I have 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.
I think some of the other commenters are glossing over that statement and being rather over-optimistic about the SEC's stance toward tolerating ICOs.
I didn't expect to see him acknowledging the positives of cryptocurrency and the ICO funding model overall.
Basically. Today ICOs are selling tokens as shares of equity in their company, or similar. Which you can then sell on.
The problem is these companies essentially reserve the right to disregard that contract and could then sell their company, domestically or overseas, for cash, without recompensating any token holders.
Securities regulation and law stops that. But the tokens do need to be lawful securities in order for the court to recognize them.
Otherwise how can the court help you, and who else is going to help you?
> […] The problem is these companies essentially reserve the right to disregard that contract and could then sell their company, domestically or overseas, for cash, without recompensating any token holders.
> Securities regulation and law stops that. But the tokens do need to be lawful securities in order for the court to recognize them.
This. IRS regards coins and tokens as capital gains taxable things regardless of whether they qualify as securities. SEC exists to protect investors from scams and unfair dealing. In order to protect investors, SEC regulates issuance of securities.
---
By and large, the structures of initial coin offerings that I have seen promoted involve the offer and sale of securities and directly implicate the securities registration requirements and other investor protection provisions of our federal securities laws. Generally speaking, these laws provide that investors deserve to know what they are investing in and the relevant risks involved.
I have 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.
---
That seems a pretty clear warning: most ICOs will be treated as securities under US law. I'd be willing to bet that the SEC will be making an example of some people relatively soon.
https://techcrunch.com/2017/12/12/sec-shuts-down-munchee-ico...
'1] This statement is my own and does not reflect the views of any other Commissioner or the Commission. This statement is not, and should not be taken as, a definitive discussion of applicable law, all the relevant risks with respect to these products, or a statement of my position on any particular product. '
Intriguing that this is a personal perspective....
I am impressed with this SEC statement.
The problem right now is with ICOs that sell tokens for something that doesn't already exist yet, as well as promise returns.
Selling a token for something that doesn't exist yet is clearly a security. Whereas selling a token that already exists, and doesn't need any additional things to be built, is probably not a security.
I am glad that the SEC seems to be getting things right.
I think for a long time this is how crypto is viewed, it is risky but people are willing to take the risk currently. More reputable US sources like Coinbase are making this possible rather than historical risky bets like mtgox, btc-e etc. In the statement they do mention whether an ICO is domestic/foreign in their research as something you should look out for in terms of the "security" of your purchase, but also whether or not the SEC can even do anything about it.
Regulation will be coming along and they have a blueprint for how that might happen, i.e. securities vs tokens/coins/currency. Before the regulation the risk is higher but probably also the reward.
At this point cryptocurrencies and ICOs are an unstoppable train, either the SEC will be able to regulate currencies + securities or some new group will be formed to handle oversight in the US at least.
What I find funny is this idea crypto won't be the next level of monitoring and control of the money supply. You crypto proponents are going to be very unhappy when you see what Uncle Sam has in store. Fiat currency has much better built-in anonymity then this block chain nonsense. And see how that is controlled, regulated, and tracked through treaties, laws, and digital mechanisms?
It is not about whether a token can rise or fall in value. It is about whether the token represents something that can be bought right NOW, or if it represents a future promise of some sort for something that doesn't exist yet. IE, funding book publishing in this example.
Yes, it is. According to the Howey Test.
ICO's certainly bring all of these things into a discussion though, don't they?
The value of the token is determined by the value of the books being shipped and the frequency and reliability of their shipment. The club managers do not affect the value of the books themselves, do not claim to affect the value of the books over time, and do not promise to provide a secondary market for those books whereby the price of the books in the future may be greater than the price of the books as delivered and thus the token is not a security representing the books. That the token itself may be privately transferred from one holder to another, without notifying or involving the token manager, doesn't make the token substantially different than, say, transferring your newspaper or magazine subscription to another person, and such subscriptions are clearly not securities.
If you did, instead, promise book token investors that there would be a secondary market for the tokens where they can easily and publicly find buyers for their tokens, and that those book club tokens would rise in value through the efforts of the book club token manager and not through the change of price, outside of the control of the book club token manager, of the underlying books, then yes, people buying the tokens deserve to understand on what principle the book club token manager's efforts will increase the value of the tokens, what risks there are associated with the manager's efforts and the promised secondary market, etc. and therefore the token is now a security.
>It is especially troubling when the promoters of these offerings emphasize the secondary market trading potential of these tokens
So let's say we had an ICO for participation in a rare book club of the month. And the books themselves were trading on the secondary market. That would be ok as I interpret this.
But if the token itself is being traded and is the asset, I think that's where the SEC gets involved.
Where I am unclear is if I have a presale for the Rare Books, and the means of currency for the future delivery of the yet-to-be-acquired rare book is a token, and that token may rise in value and transfer ownership is that a security? All the token provides me is the right to receive a rare book in the future.
Both are quite opposite to the way China is handling ICO's and crypto currency in general.
so what, are we going to stop seeing "US IP detected, unable to participate" in ICOs?
https://news.ycombinator.com/item?id=15901992
Didn't get much traction. :(
Isn't that what Brave did with the BAT ICO?
This is ominous.
It cannot scale.
It can either fall behind or adapt to change, IMO.