Digital Tokens Are Securities When Part of an ICO
A recent report published by the Securities and Exchange Commission (SEC) has confirmed that “coins” or digital tokens are securities. The ruling could affect coins offered in “Initial Coin Offerings” (ICOs).
In the press release accompanying the report, the SEC writes, “Virtual coins or tokens may be securities and subject to the federal securities laws. The federal securities laws provide disclosure requirements and other important protections of which investors should be aware.”
In the release, the SEC also explained that the source of the report focused on an inquiry into a 2016 offering known as “The DAO“. The offering was based on the Ethereum blockchain—a popular form of digital blockchain currency—that quickly fell apart when hackers stole the tokens on offer. While most of the tokens were recovered, legal fallout triggered a SEC investigation. Though no charges have been filed in the case related to The DAO, the report clearly indicates that measures may be taken going forward.
Supporters of ICOs claim that the tokens are not securities, but are instead a form of credit. However, many of the tokens are traded on secondary markets, casting doubt on the claims that tokens issued are not securities.
The report released comes at a time when many companies have completed, or are in the midst of, raising money through the ICO process. The announcement may temper some enthusiasm for ICOs in the U.S.
The Benefits of an ICO
An initial coin offering (ICO) lets a company raise capital from multiple sources, similar to an initial public offering (IPO). With an ICO, rather than issue shares of ownership, the offering company sells digital tokens or “coins” created through blockchain technology.
The popularity of recent ICOs has been well reported, with several companies raising hundreds of millions of dollars in recent months. Their ability to raise such large sums is due in part to the ease with which an ICO can be set up and investor’s desire to invest in blockchain technology.
SEC Calls for Collaboration
Of ICOs going forward, the SEC encouraged an open dialogue, suggesting that there may be other ways to use blockchain for financial gains while also protecting investors. The SEC stated, “We seek to foster innovative and beneficial ways to raise capital, while ensuring – first and foremost – that investors and our markets are protected.”
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