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SEC Fines Two Initial Coin Offerings

The SEC ordered two initial coin offerings to offer investors rescission and pay a $250,000 fine for failing to register the offerings under the securities laws. These cases represent the first time that the SEC has imposed civil penalties solely for ICO securities offering registration violations.  One of the respondents raised $15 million by selling digital tokens intended to create a new digital coin ecosystem related to advertising and mobile phones.  The other respondent raised $12 Million to create a blockchain technology for the emerging cannabis industry.    The SEC maintains that the digital tokens are “securities” under the Howey test and, therefore, the offerings violated the registration requirements of the 1933 and 1934 Acts.  Both respondents undertook to register the offerings.

Given the SEC’s concerns about disclosure and compliance for ICOs, it will be interesting to see the extent of disclosure required in the promised registration statements. 

SEC Says that Digital Tokens are Securities; Requires Trading Platform to Register as Exchange

The SEC fined and censured the founder of a digital token trading platform that failed to register as a national securities exchange.  The SEC argued that, under SEC v. Howey, the tokens traded included securities because the purchasers of tokens “invested money with a reasonable expectation of profits, including through the increased value of their investments in secondary trading, based on the managerial efforts of others.”  The token exchange allowed buyers and sellers to view pairs available for trading and a display of the top 500 bids and allowed users to enter buy and sell orders.

We expect a well-funded party will ultimately challenge the SEC in the courts about whether digital tokens are securities subject to SEC supervision.  However, until a court decides otherwise, those that trade in digital tokens and those that facilitate trading must register as broker-dealers or as exchanges.