ICOs as Securities: House Dems Say Yes, but GOP Hesitant (1)

Stay up-to-date with the latest developments in securities law through access to both news and all statutes and regulations. Find relevant corporate filings through a searchable EDGAR database. And...

By Jennifer Bennett

The SEC has suggested most initial coin offerings fall under federal securities laws, but not all lawmakers agree.

Some Republicans pushed back against classifying all ICOs as securities offerings in a May 16 House Financial Services subcommittee hearing on enforcement at the Securities and Exchange Commission.

Democrats disagreed, with Rep. Brad Sherman (D-Calif.) telling enforcement co-directors Stephanie Avakian and Steven Peikin he hoped they’d “shut it all down.”

Sherman said he’s concerned if “somebody just builds on the image of the securities laws as an unregistered offering of, quote, ‘coins,’ calls it an initial coin offering to be similar to an initial public offering and is selling an investment with no investor protection.”

One Republican lawmaker proposed a new bill addressing when and how ICOs fall under securities law. If securities law applies, then ICOs would have to register offerings with the SEC and comply with other agency regulations.

The agency currently has “dozens” of ongoing investigations into whether certain ICOs violated securities laws, Peikin said at the hearing. The most widespread violations involve out-and-out frauds and failures to register, he said.

SEC Chairman Jay Clayton previously said he’d never seen an ICO that didn’t look like a securities offering. Lawmakers from both parties asked whether the Enforcement Division took a similar approach. The agency looks at the facts and circumstances of each ICO to determine if it constitutes a securities offering, Avakian said.

Members from both parties asked about the SEC’s success policing ICOs so far. Because the technology surrounding cryptocurrency “seems to be moving at warp speed,” Rep. David Scott (D-Ga.) asked if the agency needed any assistance from Congress.

New ICO Bill on the Horizon

“I think we have adequate statutory tools” to monitor ICOs, but would be willing to work with House staff on new legislation, Peikin said. The agency has already brought some fraud cases against ICO operators, he said. The SEC has also talked some potential ICO operators out of following through with their ICOs due to regulatory concerns, Peikin said.

Rep. Tom Emmer (R-Minn.) described the “real opportunities” ICOs present and the “amazing potential” of blockchain technology. He worried that elected officials without a good understanding of the technology might overregulate and “kill” cryptocurrency before it has a chance to help the economy.

Emmer also said he worried that those involved in ICOs might not have a clear idea of who’s regulating them. Cryptocurrencies have been described as currencies, securities, and commodities, and currently the SEC and the Commodity Futures Trading Commission have both intervened in the space. Avakian acknowledged that there aren’t always clear lines, and said the agency counts on lawyers and other gatekeepers to look at digital coins’ underlying substance when advising clients.

Rep. Warren Davidson (R-Ohio) said he “looks forward to regulatory certainty” on ICOs and asked if it’s clear yet when the SEC, as opposed to the CFTC, has jurisdiction over a cryptocurrency. Federal courts are working out some jurisdiction issues, but the exact line isn’t clear yet, Peikin said.

Davidson said he’s working on an ICO bill to add some clarification on cryptocurrencies and securities law. The bill will probably touch on the appropriate test to decide if a cryptocurrency is a security, he said. It might also address whether a white paper satisfies regulatory requirements, the effect of simple agreements for future tokens (SAFTs), and the necessity of filling out certain SEC forms, Davidson said.

The SEC has issued severalwarnings to investors on how to spot fraudulent ICOs. The agency May 16 released it’s own mock-ICO website to help investors practice their fraud-spotting. The glossy site— HoweyCoins.com—features a white paper, celebrity endorsements, and a clock counting down the time remaining to earn a bonus with your purchase.

Clicking on the bright red “TOKEN SALE!” button takes investors to another page promising large discounts when they invest by certain dates. Investors who try to “Buy Coins Now!” end up on an agency page explaining the spoof sale and warning investors to be wary of similar scams.

To contact the reporter on this story: Jennifer Bennett in Washington at jbennett@bloomberglaw.com

To contact the editor responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com

Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.

Request Securities & Capital Markets on Bloomberg Law