ARTICLE
3 August 2017

SEC Says ICOs May Be Securities Offerings

DM
Duane Morris LLP

Contributor

Duane Morris LLP, a law firm with more than 800 attorneys in offices across the United States and internationally, is asked by a broad array of clients to provide innovative solutions to today's legal and business challenges.
Purveyors of initial coin offerings (ICOs) received a strong lashing from the SEC recently in declaring that one particular ICO was a securities offering that should have been fully registered with the SEC or met with an exemption from registration.
United States Corporate/Commercial Law

Purveyors of initial coin offerings (ICOs) received a strong lashing from the SEC recently in declaring that one particular ICO was a securities offering that should have been fully registered with the SEC or met with an exemption from registration. A very new and exploding technique, in ICOs companies issue digital tokens through blockchain technology to investors. It is said over $1 billion has been raised in ICOs just since this January. Several known pending deals seek to raise over $100 million each.

Because the coin purchasers do not invest in the company, some experts claim they are therefore not securities. The SEC disagreed but also said in a press release they would not bring an action against the particular company "in light of the facts and circumstances." They then issued a warning to all those in the ICO world that many other such offerings might be deemed securities, especially if they become tradeable in a secondary market as many do. In ICOs, very little information is typically provided to investors, and many deals are completed even without attorneys or other advisers.

The SEC investigated the case in question, involving a virtual company known as "the DAO," because millions of dollars of coins in their ICO were hacked (most were recovered). They also issued an investor bulletin warning the public about potential fraud in ICOs, including bad actors making promises of large returns on investment. ICOs may indeed become a worthwhile investment and method for companies to access capital, especially if promoters accede to the SEC's warning and conduct a proper IPO or exempt offering such as under Regulation D.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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