New SEC Announcement Offers Regulatory Clarity For ICOs

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On July 25th, the SEC released a statement discussing tokens and digital assets. The announcement provided much-needed regulatory clarity on Federal securities laws for ICOs, which have raised over $1 billion in capital since their introduction.

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The SEC’s ruling primarily focused on tokens sold by The DAO, a “virtual” organization that raised money to invest in other projects. The SEC determined that the tokens offered and sold by The DAO were in fact securities and therefore subject to the federal securities laws. The organization stressed that federal securities laws apply to all securities in the U.S., whether the issuing entity is a traditional company or a decentralized autonomous organization, and whether the securities are purchased using fiat or virtual currencies.

Fortunately, the SEC recognizes that each individual ICO or token issuance is different, and the not all ICO events or token issuances are securities; it depends on the “economic realities of the transaction” and each must be considered on a case-by-case basis. While some tokens will be deemed securities, others can only being considered “utility tokens” which work similarly to how subway tokens that give owners access to a transport network.

The ruling outlines how the SEC is looking to encourage blockchain-based financial innovation while protecting consumers and markets. The market was anticipating the decision, and, tellingly, the price of non-security tokens, like Ethereum, didn’t fluctuate when the SEC report came out.

The regulatory clarification should help and reassure projects that are looking to issue tokens that confidently pass the Howey Test, a key determiner of whether something is deemed a security, and thus subject to SEC regulation. Purchasers of tokens from legitimate blockchain projects that aren’t in any way offering securities can be more confident that they are backed by regulation. While illegitimate projects will increasingly be reeled in, those interested in blockchain projects should still exercise extreme caution and undergo full due diligence before participating in any token sale.

The SEC weighing in represents more widespread, public acceptance of blockchain instruments, and this will only help legitimate ICO projects. Looking forward, token sales will stand firm and create a lot of value, and even increasingly replace early-stage equity investing. But for this phenomenon to benefit the public at large, the market must set a benchmark and only support companies with working prototypes and a track record of building software.

clostArticle By Ari Meilich, Project Lead, Decentraland


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