Today, the Securities and Exchange Commission issued a press release that says that the digital tokens in one prominent ICO were in fact securities. That means that that particular ICO violated federal investment laws. The report says that many other digital coins appear to be securities, which makes them subject to federal regulation.
Companies have raised hundreds of millions of dollars in various ICOs. They were able to do it quickly because the SEC does not regulate ICOs in the same way it regulates traditional IPOs. There are no complex disclosure requirements for ICOs because they are not officially designated as “securities” under federal investment law. But at the same time tokens being sold in ICOs have many features of securities. These tokens are traded on secondary markets by speculators. The unregulated market made it possible for entrepreneurs to become instant millionaires. It was possible to start an ICO just by publishing a white paper about company’s plans with regards to digital coins.
The SEC report does not mean that the market for new digital coins will be shut down. The SEC just cautions the industry and market participants that the federal securities laws may apply to those who offer and sell digital tokens, “regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology.” The SEC did not list which ICOs are securities. That will be decided on a case-by-case basis.
Today’s SEC ruling is likely to deflate the growing bubble for ICOs in the United States, although it does not stop businesses from pursuing them overseas. Price of Bitcoin and Ethereum, two popular digital coins, fell 10% today, and there will likely be more volatility ahead.