United States: Is The Cryptocurrency Bubble About To Burst?

Initial coin offerings (ICOs) have seen incredible growth in the last year, largely outside of regulatory oversight and without the investor protection and disclosure requirements that typically apply to traditional securities or investment offerings. Blockchain startups raised five times more capital through ICOs than through traditional equity financing in 2017 and in the first few months of 2018, ICOs have raised more than $1.7 billion in capital for startups. Many individuals that invest in ICOs do so because they believe that the tokens themselves will have value, either as a currency or on a platform that is created or will be created, but with the steep rise in the value of cryptocurrencies over the past year, a significant number of purchasers of tokens do seem to be simply hoping for a jump in the trading price of the token. It clearly looks like we're in a cryptocurrency bubble right now and the question is, with regulators taking notice, 'is the bubble going to burst?'

We previously discussed ICOs and the Securities and Exchange Commission's (SEC) Report of Investigation on the DAO. But there are still open questions about other types of ICOs, where it may not be squarely an investment, but instead the token has some use other than just providing a return to the holders. That's where the SEC's Munchee case in December gave us some more color and in our recent QuickLaunch University webinar on the future of ICOs and cryptocurrencies, we discussed this case and other developments and offer a few key takeaways if you are invested in or planning to launch an ICO:

1. Every offering of securities needs to be registered or exempt. Munchee violated Section 5 of the '33 Act, which requires every securities offering to be either registered with the SEC or made under an exemption from registration. Interestingly—and the SEC pointed this out in the order—Munchee claimed to have done the Howey analysis, but had determined that there was not a significant risk of the token being a security. The SEC did not agree. The offering materials for this ICO described the way that the tokens would increase in value, which was key to the case. Also key was the fact that the offering material told the potential purchasers that the tokens would be traded on secondary markets. At the time of the sale, Munchee had developed its app, but buyers were not able to buy any goods or services on the ecosystem. Many in this market have proceeded under the impression that a token that has some utility will not be a security, but this case makes it clear that in the SEC's view, that's not enough. A token can have some utility, but if the real reason people are buying it is because they are expecting to share in the upside of the business, you need to look harder at that analysis.

2. The SEC is focusing more on ICOs, and getting it right is important as SEC pressure continues. The SEC Chairman has been very vocal in speeches and testimony and has said more than once that just about every ICO he's seen has looked like a securities offering, which makes us look at these deals very carefully as we move forward. The SEC has also warned securities lawyers that it's our role to act as gatekeepers, so you will find that the legal analysis will be rigorous to try to keep issuers and investors out of trouble.

3. It appears there will be serious enforcement activity in this space in the coming year. It's important to pay attention to the recent reports of subpoenas that are being issued to startup companies and their advisors. Most entrepreneurs have not had to interact with the SEC before. Take it seriously. If you do hear from the SEC, don't destroy any documents. If you get a subpoena, you should also immediately find experienced counsel before you start talking to SEC staff.

4. But it's not necessarily all gloom and doom. The recent SEC reports do not make it impossible to have a true utility token and not a security when you look at all the facts and circumstances. However, there is a lot of risk, and there will be a lot of scrutiny. You should, in a perfect world, be able to create a token that's linked to the use of a particular product or service not marketed as an investment, use it as a medium of exchange and have a closed system that would work. But realistically, in this climate, it's going to be a pretty high bar to say that what you have developed is definitely not a security.

5. Just remember to use caution while we're in this hot moment for enforcement. If you're thinking of an ICO, you want to think seriously about whether you can do it as a compliant securities offering. There will be some drawbacks to do it as a securities offering compared to the freewheeling ICOs of the good old days last year, but it may keep you out of trouble. There are a few different exemptions that could be available. Regulation D is one that many are thinking about and is available if you're willing to limit the purchasers of the tokens to accredited investors and meet the other requirements of the safe harbor, which includes taking reasonable steps to verify that the ultimate purchasers of the tokens are accredited investors.

To learn more about the latest enforcement actions, exemptions and other legal developments on the horizon for ICOs and cryptocurrencies, download the materials and recording from our recent webinar, Legal Landscape Update: The Future of ICOs and Cryptocurrencies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Jennifer A. Zepralka
Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions