The Securities and Exchange Commission (SEC) has recently struck hard on initial coin offerings as it started seeking subpoenas at the beginning of 2018, going back to companies that failed to provide proper insurance of their token sale. The agency’s pressure has now forced many companies to agree to refund investor money and pay a fine to settle their cases.
ICO funding began in 2014 and saw a boost in popularity last year as an alternative way to fund a cryptocurrency startup un place of the venture capital route. ICOs are startups own digital tokens which are to be used later in the ecosystem the startup ‘plans’ to build. These tokens are brought through cryptocurrencies for future use but in most cases, the companies haven’t launched a product for it.
ICO Alert displays 3,400 of more than 5,000 and CoinDesk displays only 800, of the ‘legitimate’ ICOs they have tracked down. The issue lies in whether the company presented the token as a security or did it register its offering with the SEC so as to qualify itself for an exemption.
Source: fortune.com
Many companies called their ICOs a ‘utility token’ or a ‘SAFT’ (Simple Agreement for Future Tokens, an ICO method in which investors buy a reservation for tokens yet to be launched), though the SEC doesn’t care of these labels. The SEC requires for any U.S. company offering a security to be obligated to register its offering with the SEC or qualify for an exemption. SEC allows selling only to investors outside the U.S. and individuals with income higher than $200,000 in each of the past two years or a minimum net worth of $1 million. But amid the popularity rise, practically none of the companies have registered.
Some companies who identified their offerings as SAFT are surprised to find themselves in trouble, as they seemed to be compliant with the security laws.
Cardozo Law School professor Aaron Wright, who co-authored a paper that questioned the legality of the SAFT model, says, “There could have been other ways they could have structured it, like selling a digital good to people who actually wanted to use it, instead of predominately to speculative investors. They could have talked to the SEC first. I think the law was pretty clear that if you sell something to an investor, it’s likely a security—folks just wanted to engage in token sales, so they just kind of flouted it.”
SEC has been shutting down several startups and forcing the companies to refund the buyers. In January 2018, it shut the ICO of AriseBank, for falsely stating to have bought an FDIC-insured bank. The startup which had raised around $600 million of their $1 billion goal. In April this year, the $32 million ICO of Centra, the company which was promoted by boxer Floyd Mayweather and singer Khaled got shut down for making false claims through misleading adverts.
