Despite industry confusion around ICO compliance, SEC maintains federal securities laws are crypto-suited

The initial coin offering (ICO) market is slowing down as some industry participants await more regulatory clarity, but it’s unclear whether federal legislation in the U.S. will catch up. In fact, when it comes to securities laws, the Securities and Exchange Commission (SEC) maintains current federal legislation is already applicable to cryptocurrencies.

Since the ICO boom of 2017, the popularity of the fundraising method has stagnated. The number of offerings conducted hasn’t slowed as much as the amount raised, but the steady decline is clear, and one key factor is regulatory concerns. With the rise of big headline securities cases like Kik and ICOBox, questions surrounding the clarity of securities laws have moved to the forefront. 

SEC Chairman Jay Clayton insisted in Tuesday's hearing that any selling of securities must play by SEC rules, and few on the crypto end seem to disagree. However, based on the recent unregistered securities cases the SEC has brought against crypto companies, it seems there is a disconnect in definition. The SEC has contended in the past that any public offering with a token could be considered a security and should be cleared with the SEC.

“If you have an ICO or a stock, and you want to sell it in a private placement, follow the private placement rules,” Clayton said in a June 2018 hearing. “If you want to do any IPO with a token, come see us.” 

Former SEC senior counsel Philip Moustakis litigated the first crypto enforcement case in 2013, a bitcoin ponzi scheme called Bitcoin Savings and Trust. Since then, enforcement actions have become more sophisticated, focused on any place where industry participants are interacting with cryptocurrency, according to Moustakis. Attention is given to pieces of the industry ranging from broker dealer to investment advising.

“That in part reflects the wider adoption of blockchain technology,” he said. 

Still, this wider adoption hasn’t led to a widening in legislation or application. This is because the current federal securities laws are “technology agnostic,” according to Moustakis. It doesn’t matter which technology is used in an offering if the investment maintains the elements of an investment contract, blockchain or otherwise. While there’s no digital asset-specific legislation on the federal level, the current legislation is thought to apply to all types of technology involved in offering sales. Moustakis pointed out that there isn’t federal clarification for use of the internet in securities sales, and neither is there for blockchain. As long as required registration is sought and information is shared with investors and the SEC, things should be fine, according to Moustakis. 

“As the SEC would say, its senior management and the commissioners themselves would say, the SEC takes a principles based approach to regulation of the capital markets, and so doesn't need specific legislation for every wrinkle or turn in those markets,” he said. “That's the view that the commissioners and senior management in the commission have been expressing, particularly in the cryptocurrency context.”

The industry is taking notice of this attitude. Nick Grossman of Union Square Ventures said on a recent episode of The Scoop that it only makes sense that the SEC would take a broad view of the Howey Test, the standard for differentiating securities from other asset classes in the U.S. In reference to the possibility that the application of Howey could be refined with the litigation of securities cases like Kik, Grossman contended it’s unlikely though not impossible that clarity on tokens would come from the SEC. Still, cases like Kik’s shed light on the securities question in the ICO market, which is ultimately a good thing, according to Grossman.

“The interplay between the courts interpreting Howey versus the regulators and others will hopefully be a good thing for crypto because it will bring us more clarity as to where the contours really are as of right now,” he said on The Scoop. “It does feel like in the U.S. there's a cloud over the industry because of the SEC’s broad interpretation of Howey. I hope that's not ultimately a big problem for the sector because the sector is really important and I want it to flourish here in the U.S. but it's gonna take a while for that to suss out.”

On the SEC side, Clayton said at this week’s Congressional hearing that the view of the regulator remains concrete.

“If you are using a digital asset to raise capital for a project, that’s a security,” he said.

Some tokens in the space seem to have a both/and quality when it comes to the question of utility and security classes. While cases like Kik and ICOBox argue their tokens are primarily a utility due to their purpose for use on a company platform, having qualities of a security has incurred legal action from the SEC. According to Moustakis, just because a token has a utility, doesn’t mean it won’t be considered a security by SEC standards and therefore require registration. 

“Just invoking the word utility doesn't get you out of that framework,” he said.