Over the past several months, the U.S. Securities and Exchange Commission has launched a major enforcement initiative against initial coin offerings, otherwise known as ICOs. An ICO is defined as a “means of crowdfunding centered around cryptocurrency, which can be a source of capital for startup companies.” The marketed coins are “preallocated to investors in the form of ‘tokens,’ in exchange for legal tender or other cryptocurrencies ... These tokens supposedly become functional units of currency if or when the ICO's funding goal is met and the project launches.”
SEC Regulation A may present an attractive financing option for issuers of "token" securities. However, issuers should expect that the SEC will be closely monitoring activity in this space and will take swift action if it has concerns about potential investor harm.
The SEC's Divisions of Enforcement and Trading and Markets put forth a “Statement on Potentially Unlawful Online Platforms for Trading Digital Assets” regarding the legal ramifications of such platforms operating as “exchanges,” as defined by the federal securities laws. Such a designation requires that the platform must register with the SEC as a national securities exchange or be exempt from registration -- practically meaning registration as an alternative trading system (“ATS”). Each road to registration is fraught with its own pitfalls that need to be carefully examined but for those entities already in operation and potentially within the crosshairs of the SEC, the only viable business option is to try to register as an ATS.
An issuer of a coin or token in an initial coin offering “generally” is a money transmitter under Financial Crimes Enforcement Network’s regulations, FinCEN indicated in a letter it made public on March 6, 2018.