SEC Points to Regulating Initial Coin Offerings

The US Securities and Exchange Commission has determined that ICOs and digital currencies are now subject to federal law.

digital-coin-offering

With the rising popularity of cryptocurrencies and digital coins, it should come as no surprise that the Securities Exchange Commission (SEC) has finally stepped in. 

On Tuesday (July 25), the SEC released a statement indicating that initial coin offerings–which is a crowdfunding technique that companies use to raise money through blockchain–should adhere to the same requirements as the federal securities laws.

As such, the SEC determined that if an investment transaction includes an offer or sale of security, no matter the terminology or technology, it will be dependent on the situation, including the “economic realities of the transaction.”

The release continued, stating that the reasoning for the regulations under the federal securities law is so that investors are protected with all the proper disclosures and are “subject to regulatory scrutiny.”

“The SEC is studying the effects of distributed ledger and other innovative technologies and encourages market participants to engage with us,” SEC Chairman Jay Clayton said in the release. “We seek to foster innovative and beneficial ways to raise capital, while ensuring – first and foremost – that investors and our markets are protected.”

William Hinman, director of the division of corporate finance, said in the release that investors need the “essential facts” when it comes to investment opportunities so they can make educated and informed decisions.

“The innovative technology behind these virtual transactions does not exempt securities offerings and trading platforms from the regulatory framework designed to protect investors and the integrity of the markets,”  Stephanie Avakian, co-director of the SEC’s enforcement division said in the release.

With that in mind, a number of tech start-ups have raised a substantial amount of money through initial coin offerings this year. As reported by Reuters, over $1 billion in 89 coin sales has been raised–which is 10 times more than it was in 2016.

For example, in mid-June a tech company raised more than $150 million through initial coin offering in under three hours, while another start-up company called Status raised more than $100 million. Similarly, Bloomberg reported that other recent ICOs, such as tech start-up Gnosis, raised $12.5 million in 12 minutes in April.

Following the SEC’s announcement on Tuesday, top cryptocurrencies such as Bitcoin and Ethereum have dropped in price. Bitcoin is down 2.56 percent to $2,488.22 as of 1:47 p.m. EST on Wednesday (July 26), while Ethereum has slid marginally by 1.14 percent to $201.59 as of 1:47 p.m. EST.

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Securities Disclosure: I, Jocelyn Aspa, hold no direct investment interest in any company mentioned in this article.

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