SEC Fires 'Shot Across the Bow' With Statement on Initial Coin Offerings

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Jay Clayton. Photo Credit: Diego M. Radzinschi/ALM. [/caption] Monday afternoon, hours after announcing one California company had halted its $15 million ICO following a probe from the agency, SEC chairman Jay Clayton issued a statement further warning investors of the risks posed by the new offerings. “A number of concerns have been raised regarding the cryptocurrency and ICO markets, including that, as they are currently operating, there is substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation,” Clayton said in the statement. In the enforcement action filed earlier Monday by the U.S. Securities and Exchange Commission against California-based Munchee Inc., the SEC made an example of the company, stating the “utility tokens” it offered investors could be considered securities and therefore subject to regulatory oversight. No initial coin offerings, to date, have been registered with the SEC, as Clayton pointed out in his remarks. “If any person today tells you otherwise, be especially wary,” Clayton said. His statement goes on to warn investors to use common sense when considering investments in initial coin offerings. He even provides sample questions investors should ask such as: If a blockchain is used, is the blockchain open and public? Is there trading data? If so, is there some way to verify it? Shortly after Clayton’s statement was published Monday afternoon, U.S. Commodity Futures Trading Commission chairman J. Christopher Giancarlo issued a statement commending Clayton's "strong statement." Giancarlo said the SEC and CFTC face similar challenges around virtual currencies and have been in regular communication about paths forward. "I have said consistently that virtual currencies are unlike any commodity that the CFTC has dealt with in the past, and I know they pose challenges for the SEC as well. … I want to reiterate my previously stated emphasis that market participants should take note that the relatively nascent underlying cash markets and exchanges for bitcoin remain largely unregulated markets over which the CFTC has limited statutory authority. Investors should be aware of the potentially high level of volatility and risk in these markets.” Nicolas Morgan, a partner at Paul Hastings, called Clayton’s statement “remarkable,” particularly given the fact that it was issued personally by the chair and not through normal communication channels such as official reports like the DAO Report, public speeches, no-action letters and various bulletins and alerts. “While the means of communication chairman Clayton chose are noteworthy, the content of his message should come as no surprise to those who have been following the SEC’s actions on ICOs,” Morgan said in an email to Corporate Counsel. According to Morgan, the SEC asserted its jurisdiction with its DAO Report, which was published in July and determined that digital assets of virtual organizations are considered securities. The investigative report detailed how ICOs or "token sales" could be "subject to the requirements of the federal securities laws." And now, Morgan said, the SEC's enforcement actions against ICOs are “a shot across the bow.” “The various speeches and alerts over the last few months served to let ICO issuers know the SEC is watching,” he said, noting that Monday’s statement “goes further by indicating where the SEC might go next: to promoters, gatekeepers and secondary market participants." "In short, the chair is indicating that the SEC will be policing the same types of market participants in the ICO space that it already does in the broader markets,” he added.