This summer the U.S. Securities and Exchange Commission (SEC) released a Report of Investigation (Report) that represents the first major U.S. regulatory guidance for the mushrooming cryptocurrency markets. Ally Law member firm Rich May has prepared a primer of the key provisions of the Report and what they mean. A brief summary of the primer follows; click here for the full article.
Cryptocurrencies, Bitcoin being the first and most well-known, are a recent development best described as digital currency. Cryptocurrencies are powered by blockchain technology, which acts as a public, distributed ledger recording all peer-to-peer transactions in the cryptocurrency. Blockchain technology provides the security, privacy, and decentralization that underlie the popularity of cryptocurrencies. The SEC has investigated a recent example of an investment scheme run on a blockchain system which raised the equivalent of $150 million in its month-long token offering period, but which was then cyber-attacked and lost one third of the raised cryptocurrency.
The SEC investigation focused on this situation an example of a recent trend for raising capital known as “Initial Coin Offerings” or “Token Sales” and how these offerings fit into the framework of existing U.S. securities laws. The SEC has regulatory oversight over the offer, sale, purchase, solicitation or other activity involving “securities.” The Securities Act defines “securities” to include “an investment contract.” Securities law is indifferent to the name of an investment, instead studying the underlying characteristics of what is being offered. The label of “coins” or “tokens” is therefore irrelevant in determining whether an investment is a security. The SEC found that Tokens at issues were indeed securities.
As a security, any offering of coins or tokens such as the ones at issue requires registration with the SEC (and applicable states) unless an exemption is available. Registration is time consuming and expensive, and once public, an issuer must comply with extensive reporting requirements. These registration requirements will likely have a chilling effect on Initial Coin Offerings in the U.S. going forward, although the Report does not seem to have any effect on the status of cryptocurrency in the traditional sense. Other findings by the SEC will impact secondary markets.
This area of securities law will continue to evolve in every country as blockchain technology and cryptocurrencies gain mainstream acceptance. Seek guidance from the securities attorneys at your Ally Law member firm if you are involved in cryptocurrency transactions or offerings to assure you comply with all national and local laws. For more information about our services in this area, contact us at email@example.com.
Click here for the complete article by Thomas Bilodeau, III and David Glod. of Ally Law member Rich May, PC.