The Securities and Exchange Commission (SEC) has released an updated set of guidelines on initial coin offerings (ICOs).
The new guidelines now sit in a dedicated and prominent section of the regulator’s website: SEC.gov/ico. This page now lists five aspects of ICOs the SEC considers essential, as well as a separate section for investors and market professionals.
Our guide to initial coin offerings: https://t.co/N1cfvEjmM6
— SEC_News (@SEC_News) February 10, 2019
The content appears to have existed since March last year, with the SEC opting to draw renewed attention to the new page this week. The material is a relatively understandable collection of advice for the ICO sector by the SEC, coming in the form of a user guide instead of technical literature.
The five descriptive areas listed appear to summarise the organisation’s current perspective. These include confirmation that a token issued in an ICO can be a security in need of registration with the SEC (regardless of how its issuer refers to it).
The guide also makes familiar reference to the risks involved for investors and asks them to do their own research before parting with any capital.
The guidelines state that “companies and individuals are increasingly considering initial coin offerings (ICOs) as a way to raise capital or participate in investment opportunities.”
“While these digital assets and the technology behind them may present a new and efficient means for carrying out financial transactions, they also bring an increased risk of fraud and manipulation because the markets for these assets are less regulated than traditional capital markets.”
SEC jurisdiction over the token economy
Just last Friday, Hester Peirce (one of five commissioners in the SEC) gave a speech about what she believes is the optimal level of regulatory oversight required to foster innovation and entrepreneurship in the token ecosystem.
In the speech, the SEC commissioner made the distinction that tokens sold for use in a functioning network are not necessarily securities (or come under the SEC regulatory jurisdiction).
The commissioner said that “when the tokens are not being sold as investment contracts, they are not securities at all. Tokens sold for use in a functioning network, rather than as investment contracts, fall outside the definition of securities.”
Peirce reiterated that the SEC still applies existing securities laws to any token sales or ICOs, which means that they must still be conducted in accordance with the relevant securities laws.
Decentralisation as a tiebreaker
An area where people have been seeking clarity from the SEC is in regards to decentralisation. This seems to be the tiebreaking factor in working out whether an asset is deemed to have regulatory oversight as a security or a commodity under the supervision of the CFTC (Commodity and Futures Trading Commission).
The term ‘decentralisation’ was mentioned six times in Peirce’s speech last week. She said that “decentralisation is nothing new; it is at the root of our economic system; free markets draw on the talents and knowledge of people all across society to produce what society needs.”
She then went on to give a quote from Bill Hinman’s (the SEC’s Director of Corporation Finance) speech from June last year where he said that once “a network becomes truly decentralised, the ability to identify an issuer or promoter to make the requisite disclosure becomes less meaningful,” which would imply that subsequent offers and sales of tokens in such a network are no longer subject to securities laws.
Getting around Howey and the SEC
Peirce also mentioned that the US Congress may resolve the ambiguities of the Howey test by simply requiring that at least some digital assets be treated as a separate asset class. A recent bill introduced in the House of Representatives intended to amend the federal securities laws to do just that “provided that the token truly operated in a decentralised network,” Peirce said.
The SEC vs the CFTC
All these angles to decentralisation are part of an ongoing jurisdictional debate between two powerhouse US regulators in the form of the SEC and CFTC.
If a crypto asset can one day crack the formula to not be labelled a security, it would open the door for the SEC to shift responsibility to their friends at the CFTC. This agency has already shown a willingness to approve and open up the institutional market to a number of regulated products in the form of Bitcoin futures at the CME, CBOE, and the soon to launch ICE exchange.
On the other hand, the SEC as an agency has continued to reject and deny any ETF applications on the grounds of custody, manipulation, and lack of proper pricing data. If they continue to reject proposals, then we may see a shift in the approach of regulated exchanges to target new crypto futures products instead of the seemingly holy grail of a Bitcoin ETF.