SEC: 'token' sales are securities

The US Securities and Exchange Commission last week found that offers and sales of "initial coin offerings" or "tokens" by "virtual" organisations using blockchain technology are most likely securities and subject to federal regulation.

So far this year, US firms have raised US$1.3 billion from initial coin offerings (ICOs), a type of blockchain crowdfunding for startups.

In a release, the SEC said that those who offer and sell securities in the US are required to comply with federal securities laws, regardless of whether those securities are purchased with virtual currencies or distributed with blockchain technology.

The regulator reached that conclusion on ICOs after investigating a token sale in June 2016 by an organization known as The DAO, one of a recent spate of ICOs.

According to the regulator, the tokens offered by The DAO were securities and therefore subject to the securities laws.

“Investors who purchased DAO Tokens were investing in a common enterprise and reasonably expected to earn profits through that enterprise…” the Commission said. 

While the DAO has been described as a "crowdfunding contract" the SEC argued it would not have been eligible for the crowdfunding exemption to the securities laws because, among other things, it was not a registered broker-dealer or fund portal.

Stock offerings? 

"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," the Commission's enforcement division said in a release.

However, the Commission decided not to bring charges in this instance, or make findings of violations in its report, but will use the results of the investigation to warn the industry and market players.

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

According to Ripple chief executive, Brad Garlinghouse, rather than delivering something to investors that can be used to exchange value on a specific economic platform, some of the tokens offered seem to have no inherent utility.

"Instead, these ICOs were based on little more than a white paper and look much more like (not especially attractive) stock offerings."

The cryptocurrency company head said he was happy to see SEC step into the ring this week to clarify that certain types of ICOs are actually securities.

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