The Securities and Exchange Commission (SEC), the US agency responsible for enforcing federal securities law, has made a significant move into regulating ICOs.
The agency has released a report concluding that digital currency events will be regulated as securities. This means that unregistered ICOs will now be treated as a criminal punishment.
The investigation was centred around the distribution of tokens relating to The DAO. The Ethereum-based funding vehicle collapsed last year after a flaw in its code was exploited
Stephanie Avakian, Co-Director of the SEC’s Enforcement Division, said:
“The innovative technology behind these virtual transactions does not exempt securities offerings and trading platforms from the regulatory framework designed to protect investors and the integrity of the markets.”
For the many startups who have been using ICOs as an alternative route to raising capital, this ruling may not be welcomed. The SEC’s main objection to unregistered ICOs is that the lack of oversight about what businesses do with the proceeds, does not give investors a clear idea of the underlying risk.
In a recently published investor bulletin on ICOs, the SEC elaborates further on its doubts:
“Investing in an ICO may limit your recovery in the event of fraud or theft. While you may have rights under the federal securities laws, your ability to recover may be significantly limited.”
William Hinman, Director of the Division of Corporation Finance, SEC, said:
“Investors need the essential facts behind any investment opportunity so they can make fully informed decisions, and today’s Report confirms that sponsors of offerings conducted through the use of distributed ledger or blockchain technology must comply with the securities laws.”