staff of the SEC’s Division of Corporation Finance has issued no-action relief that
allows an initial coin offering without registration. The no-action relief relies on an opinion of
counsel that the underlying digital tokens are not securities as well as several
other conditions including (i) the sponsor will not further develop the
platform, (ii) the tokens will be immediately useable and functional, and (iii)
the tokens are not marketed in a manner that emphasizes their potential for increased
market value. In
a companion release, the SEC Strategic Hub for Innovation and Financial
Technology (FinHub) issued guidance about how to determine if an ICO is an
offering of securities under the applicable
test. FinHub relies heavily on whether
the sponsor of the network will engage in further development of the network or
digital asset so as to generate increased market value for investors. Howey
Up until now, the SEC has taken the position that ICOs are securities offerings , subject to the Securities Act’s registration and disclosure requirements. This no-action letter and companion guidance suggest that the SEC may back off its aggressive position and allow the digital token world to evolve organically. What is unclear is whether any ICO sponsor should go forward without a no-action letter.
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.
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.