Initial Coin Offerings Will Have to Register as Securities

SEC Chairman Jay Clayton strayed from his speech to an exclusive group of lawyers, saying “I have yet to see an ICO that doesn’t have a sufficient number of hallmarks of a security,” according to the Wall Street Journal.

In a recent speech to an exclusive group of attorneys in New York, Walter Joseph “Jay” Clayton III, Securities and Exchange (SEC) Chairman, in prepared remarks and brief statements, equated Initial Coin Offerings (ICOs) with securities, which will mean massive regulation of a red-hot market.

It’s the elusive Chair’s first statements regarding cryptocurrencies after President Trump nominated him in January (he was confirmed Summer by the Senate).

SEC Chairman Sees a Sufficient Number of Hallmarks

His talk was delivered to the 49th Annual Institute on Securities Regulation in New York City’s Roosevelt Hotel on 8 November 2017. Sponsored by the 84 year old Practising Law Institute, an organization created during the New Deal, it’s a non-profit continuing legal education outfit. The three day gathering they host is a must for any LLC, and for a 2,495 USD ticket price readers can be sure those attending had networking opportunities galore.

“When you depart from the bitcoin or the ethereum, and you get into the tokens, the hallmarks become pretty clear,” Chair Clayton told the Journal. He is a long-time attorney who has represented Deutsche Bank, UBS (his wife worked for Goldman Sachs at the time of his nomination).

“Mr. Clayton said many ICOs resemble traditional stock offerings, with the only difference being the new fundraising tool involves tokens and distributed-ledger technology,” the article continued.

Better than 150 ICOs have raised upwards of 3 billion USD this year alone, attracting attention from celebrities, Wall Street, and, increasingly, government regulators. A number of governments have come down on ICOs, most notoriously China, and this appears to be a trend at least in the near future.

A Distinct Lack of Information

Chair Clayton’s, Governance and Transparency at the Commission and in Our Markets, opening night keynote, revolved around securities insider baseball: budgets, long and near-term plans, and a vague five year outlook for the SEC. Toward the end of his speech, exactly two paragraphs were dedicated to ICOs.

Under the heading, “Initial Coin Offerings,” he immediately lamented “a distinct lack of information about many online platforms that list and trade virtual coins or tokens offered and sold.” He quickly goes on to warn how “investors often do not appreciate that ICO insiders and management have access to immediate liquidity, as do larger investors, who may purchase tokens at favorable prices.”

“Trading of tokens on these platforms is susceptible to price manipulation and other fraudulent trading practices,” the Chairman elaborated.

He continued to explain ICOs “may be securities, and those who offer and sell securities in the United States must comply with the federal securities laws” and “any person or entity engaging in the activities of an exchange must register as a national securities exchange.”

In what might be interpreted as a slightly more aggressive tone, he ends with how “the Commission will continue to seek clarity for investors on how tokens are listed on these exchanges and the standards for listing; how tokens are valued; and what protections are in place for market integrity and investor protection.”

Implications of SEC registry means teams of attorneys for future ICOs.

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