SEC Chair Jay Clayton asserted that initial coin offerings ("ICOs") are likely to involve the sale of assets that qualify as securities, and urged investors to proceed with caution when considering ICO or cryptocurrency-related investments. His formal statement is directed at investors and market professionals acting as gatekeepers, and warns the latter group to focus on their responsibilities under the securities laws.
Chair Clayton urged market professionals to review the SEC report on the application of securities laws to initial coin offerings. In the report, the SEC applied longstanding securities law principles to determine that particular ICO tokens qualified as securities and, thus, were subject to relevant federal securities laws. Chair Clayton asserted that tokens and offerings that incorporate features and marketing efforts that emphasize the potential for profits based on the entrepreneurial or managerial efforts of others bear the hallmarks of securities. He warned professionals that they cannot avoid regulatory requirements simply by representing that a particular token or coin provides utility or "structuring it to provide some utility." He said that such representations "elevate form over substance." While Chair Clayton acknowledged the possibility that certain cryptocurrencies and ICO tokens may not comprise securities, he urged regulators and other market participants to fulfill their responsibilities in order to ensure investor protection. He also noted that he has instructed the SEC Division of Enforcement to police ICO offerings vigorously, and warned that in addition to securities registration, promoters should consider broker-dealer and exchange registration requirements.
Chair Clayton also urged market professionals to act with particular vigilance when dealing with cryptocurrency transactions. He encouraged broker-dealers and other market participants that allow for payments in cryptocurrencies to ensure that cryptocurrency transactions do not interfere with their ability to meet anti-money laundering and know-your customer obligations. While cryptocurrencies may or may not ultimately be considered as securities, Chair Clayton added, the SEC will closely monitor their impact on and interaction with the securities markets.
CFTC Chair J. Christopher Giancarlo praised Chair Clayton for his statement, noting that virtual currency markets are still largely unregulated and present challenges for regulatory agencies. According to Chair Giancarlo, "CFTC and SEC staff are in regular communication on these issues," and investors should be aware of associated volatility and risk.
Commentary / Jeff Robins
The doctrinal lines about when an ICO becomes a security offering or when a cryptocurrency becomes a security may be debated for some time, but this statement is about as loud and clear a warning as the Chairman could give of his intent to police this market. In addition to Clayton's warnings about ICOs, broker-dealers and securities intermediaries should also note his discussion of acceptance of cryptocurrencies as payment for securities transactions.
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