SEC Subpoenas And Guidance On Investing In Cryptocurrencies And ICOs

Technology companies and advisors involved in cryptocurrencies have received a number of subpoenas and information requests from the U.S. Securities and Exchange Commission (SEC) during the last few weeks and they are alarmed.  While the content of these subpoenas and information requests have generally remained undisclosed and will continue to remain as such for weeks to come, the SEC recently published guidance on investing in cryptocurrencies and ICOs that provides information about the three “Rs” of ICOs: Risks, Rewards and Responsibilities.  The SEC guidance is summarized below and may provide insight about the contents of the recently issued subpoenas and information requests.

Some Things Investors and Market Professionals Need to Know about ICOs

• ICOs can be securities offerings. ICOs can be securities offerings and if an ICO is a securities offering, then it is subject to the federal securities laws.
• ICOs must be registered or exempt. ICOs that are securities offerings must be registered with the SEC or fall under an exemption to registration.
• A Utility token may also be deemed to be a Security Token. ICOs may involve tokens that are labeled as utility tokens but this does not prevent the tokens from also being classified as security tokens.
• ICOs can be great or terrible investments. There are ICOs that are honest invest opportunities and ICOs that are fraudulent. ICOs are subject to risks such as loss or manipulation, including through hacking, with little recourse for victims after-the-fact.
• Ask questions before investing. Investors should ask questions and demand clear answers about the ICO before investing their hard-earned money. In the famous words of Warren Buffett, “Never invest in a business you cannot understand.”
• The SEC may not be able to effectively pursue bad actors or recover funds. This is because funds may quickly move across national borders and significant trading occurs on systems and platforms outside the United States.
• Make sure the ICO is legal and the financial professional involved is licensed. Do your homework and read this SEC Investor Bulletin.
• If the ICO sounds too good to be true, it probably is and you should proceed with extreme caution. This refers to ICOs like Plexcorp and Munchee, which I have previously blogged about.
• Market Professionals (MPs) should exercise caution when promoting or facilitating transactions. MPs should not promote or tout the offer and sale of coins until it is clear whether or not securities laws apply. Systems and Platform operators that effect or facilitate transactions may be deemed as accomplices by operating unregistered securities exchanges or broker-dealers in violation of the Securities Exchange Act of 1934.
• MPs are expected to help protect investors. MPs including securities lawyers, accountants and consultants, are gatekeepers and all must work to protect Main Street investors.
• MP’s should be intimately familiar with the DAO Report. The DAO Report was released in 2017 and the SEC concluded that DAO Tokens are securities under the Securities Act of 1933.

The SEC plans to expand oversight and enforcement in emerging areas such as financial innovation, market structure and cybersecurity in fiscal year 2019 in an attempt to carry out its mission to protect investors, maintain fair and orderly markets and facilitate capital formation.  This means that companies and investors should take caution before launching or investing in ICOs and MPs should do their best to ensure they are not enabling fraud, market manipulation or securities law violations.