Thursday, April 26, 2018

In the Securities Era, ICOs Pleading Ignorance Have No Place to Hide


ICOs seeking to crowdfund their big idea have a quandary: should they register their token as a security, complete with the expense, delays, and paperwork this entails, or should they brand it a utility and hope the SEC doesn't come after them? Last year, virtually everything was labeled a utility and SEC-compliant crowdsales were almost unheard of. But in 2018, launching a utility token in the U.S. is fraught with risks and uncertainty. To tap into the lucrative U.S. market, the regulatory route is now the only viable path to follow.

Ignorance of Securities Law Is No Excuse
When token sales emerged, they were seen by advocates as a great source of capital that circumvented existing restrictions on fundraising. As it turns out, ICOs can be a great means of raising money, but they are not a new fundraising vehicle that is exempt from the law. For the first half of 2017, ICOs such as Tezos merrily raised funds from U.S. investors under the assumption that their crowdsale was above board because it involved a utility token rather than a security. But as subsequent lawsuits have shown, just because something's branded as a utility doesn't make it one.

In the Securities Era, ICOs Pleading Ignorance Have No Place to Hide

By late last year, the number of ICOs willing to accept U.S. investors had dwindled to a trickle and projects were tripping over themselves to preface every mention of their token with the words "UTILITY" for the avoidance of doubt. Others have published their responses to the Howey Test as further evidence that their token could not possibly be a security. Well-meaning as these attempts may be, they do not change the fact that most ICO tokens almost certainly constitute a security, a view espoused by SEC chairman Jay Clayton.

Litigation Lawyers Have Their Say
At Start Engine's ICO 2.0 Summit in Santa Monica on April 20, one of the most interesting panel discussions was loaded with litigators. "ICO Litigation and Enforcement Update" included Nick Morgan, a partner at Paul Hastings, Dan Moylan, a litigator at Venable, and Perrie Weiner from DLA Piper, all of whom are familiar with the inner workings of the SEC and securities law.

In the Securities Era, ICOs Pleading Ignorance Have No Place to Hide
Nick Morgan
Nick Morgan was senior trial counsel in the SEC's enforcement division, making him well aware of the reluctance of the SEC to say "Yes". "In 2017 we saw a lot of 'No'," he observed during the panel discussion. "The question is 'Can I offer my token for sale without registering it or being exempt?' The SEC in 2017 and 2018 has repeatedly said 'No'…What we're waiting for and hopeful to see…is a 'Yes' from the SEC."

He later added: "The first place we may get a 'Yes' will be from a judge," and explained how "institutionally [the SEC] are reluctant to do so, because once they say 'Yes', everyone goes through that channel…but we may see a judge, in a case that's being litigated, who says 'This is not a security'".

Fellow panelist and litigator Dan Moylan noted: "When you look at the various regulatory agencies' statements and actions in 2017 and so far in 2018, frankly in many ways they're predictable…they told you what they were gonna do. They made it very clear, whether it's the SEC or the CFTC or any number of other alphabet agencies."

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