As anticipated, the U.S. Securities and Exchange Commission (SEC) has taken a direct interest in ICO fundraising campaigns. Today it issued “dozens” of subpoenas and requests to both companies and advisers involved in token sales, seeking further information on how sales and pre-sales are structured.
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SEC Action Expected for a While
The SEC’s move won’t shock anyone who’s been observing the ICO and blockchain space — high-level agency officials have made overt statements recently that it feels several ICO fundraisers are breaching securities laws. The SEC has also published a number of advisory notices warning investors of the risks.
The Wall Street Journal reported that the SEC was refusing to provide further details on the subpoenas for now.
In his recent testimony before the U.S. Senate, SEC chairman warned the agency regards many tokens sold in ICO campaigns as securities, whether project organizers intended them to be or not. He had also previously cautioned ICO operators to be “on high alert” if their campaigns were at risk of violating securities laws — in fact or in spirit.
That advisers have received subpoenas as well as campaign operators will likely cause further concern. Attorneys who provided legal advice, or third-party business operators who received tokens in return for supplying industry experience will face the same scrutiny.
Are Subpoenas for Fact-Finding or to Set an Example?
The SEC may simply be on a fact-finding mission with a view to drafting stricter regulation for token sales in the future. Or it may be looking for one party to single out as an example/warning to others.
In 2013, the New York State Department of Financial Services also subpoenaed over 20 companies working the bitcoin and cryptocurrency space, an action that led to the state’s often-criticized “BitLicense” law.
However, New York also fingered one exchange operator who’d been cooperating with the authorities — BitInstant founder Charlie Shrem — and charged him with money laundering offenses, for which he later served jail time.
Admit It, ICOs Are a Risky Bubble Now
Even seasoned blockchain industry veterans have referred to the billions of dollars raised in ICO sales as a “bubble” or a “fad” — or even worse, a “wild west” of unregulated capital-raising that mimicked public share offerings with none of the regulatory oversight or legal obligations.
It’s estimated ICOs and token sales have raised over $6 billion in the past year, and $2 billion of that in 2018. It hasn’t always resulted in happy endings for investors or projects, with some reports claiming half of all token sales flop without reaching their target.
Blockchain projects often made grandiose, world-altering promises for their technology, few of which had been proven to work at the scale required. They range from simple exchange trading tokens to currencies for planet-wide distributed computing and storage platforms.
Several have fallen from the spotlight, angering buyers looking for a lottery win as tokens they purchased for pennies or less were suddenly trading for $20 each.
Plenty of Actual Scams, Hacks
And of course, many were outright scams. Sometimes, even the apparent scamminess of a token wasn’t enough to dissuade buyers, who figured they’d be OK if they could make a quick exit.
Ernst & Young claimed as much as 10 percent of all funds raised in token sales had simply vanished after operators took the money and ran, or hackers exploited flaws in poorly-made token wallets or security models.
Even the “success stories” haven’t always achieved crypto nirvana. Tezos, which raised an eye-popping $232 million in one of 2017’s highest-profile ICO campaigns, has been mired in legal disputes and development delays.
Whatever action the SEC takes next, one thing is for certain — ICO organizers will be treading far more carefully from now on. And that’s likely to be more time-consuming and expensive.
What will happen to ICOs from here on? Let’s hear your thoughts in the comments.
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