Play by The Rules: Legal Experts Talk ICOs and SEC Warning

The SEC report released on July 25 was anticipated but did come earlier than many traders, investors and developers in the digital currency market expected. While at the moment it is a stern warning rather than a course of action parties who did not comply with the Securities Exchange Act [1934].

Key takeaways include the SEC concluding that DAOtokens were, in fact, a security and that distributed ledger or Blockchain based securities must register offers unless valid for an exemption.

Jay Clayton, SEC Chairman, says:

“The SEC is studying the effects of distributed ledger and other innovative technologies and encourages market participants to engage with us. We seek to foster innovative and beneficial ways to raise capital, while ensuring – first and foremost – that investors and our markets are protected.”

The release goes on to articulate that essential facts must be given to investors in order to make informed decisions. Complying with securities laws is a step to legitimize the ICO trend that could include money grab schemes that will not end well.

Charlie Lee, the founder of Litecoin and Charles Hoskinson, one of the original founders of Ethereum are two prominent voices who have pointed this out in the past.

Regulation is, of course, a necessary step forward in the maturing market that is digital currencies. What this does, however, is leave a grey area in both the knowledge of investors and potential creators or new projects by way of ICOs.

Cointelegraph got in touch with some of the leading legal experts to discuss the issue.

Vague ICOs will soon become history

The July 20 discussion took place in New York with leading experts in the field sharing regulatory insight. The event was moderated by Morrison & Foerster’s Blockchain + Smart Contracts leaders Joshua Klayman and Daniel Kaharan.

According to Kaharan, more than $700 mln [has been raised by way of ICO] in 2017 alone, potentially global in scope, which as lawyers makes us extremely nervous. He explains that the due diligence process for token sales is very different from venture capital, despite being often compared to VC. The uncertain regulatory environment means that token sales will have to move forward very carefully from the SEC warning onwards.

The definition of what exactly a token is, is part of the problem. While some investors like to view it as a stock or share, others deny this definition because many tokens have an inert use[s].

PwC’s Subhankar Sinha says:

“We need to have a definition, my definition is a token is permission to play in an ecosystem. A crypto token is a permission to play in a peer to peer network… It’s going to be put on a decentralized ledger and anyone who wants to host it, can host it.”

Emma Channing, General Counsel at Argon Group points out that despite the large injection of capital in ICOs there are ones that fail. Key triggers are teams who are not public on Linkedin or a product that is not directly connected to Blockchain technology in some key.

Lastly, she adds, that there is a critical line of contact via chat rooms like Slack or Telegram – teams have to educate their market. If we take her points into consideration it is already in line with the advice of the SEC – public figures must explain effectively what investors are buying into.

Vague ICOs without names and profiles behind them will very soon become a thing of the past.

Nick Chirls, founder and partner at Notation Capital says:

“What you’re seeing now is what happens when you create a financial market and there’s zero regulation. What you’re seeing now is the full range of highly responsible behavior that will be very positive for the ecosystem going forward, and some projects that lack that. That, I think really is a major risk for the ecosystem.”

Chirls adds that while regulatory bodies have given some sort of comment, from the FTC to the SEC, there is still no de facto regulation as of yet.

A powerful piece of legislation

While Chirls, feels there is little to no regulation, Channing disagrees and notes that SEC’s Rule 506(c)  is a powerful piece of legislation and [a number] of ICOs are in fact following it.

AML and KYC are important, although there is a limit as to where it should be implemented. Many investors only spend a negligible amount of funding and not hundreds of thousands of dollars.

Channing explains:

“506(c) allows you to do a general solicitation. You can do interviews, you can approach people. It is an incredibly powerful piece of legislation. The idea that there is no universe of law around app coins is just simply not true.”

She concludes that badly drafted fraudulent white papers people will sue on as they have rights under fraud and contract.

In a note to Cointelegraph Carol Van Cleef, fintech lawyer at BakerHostetler, comments:

“The SEC’s announcement is not a surprise and definitely does not mark the end of the road for tokenizations. In fact, it should have a very positive effect on the token market. It removes a much uncertainty in the market and clarifies that the SEC will not consider all tokens to be securities. It is very consistent with the advice we have been providing to clients.”

She assumes that for those who are looking at issuing a token solely to raise money for a business venture, the SEC has made clear that the offering must comply with federal securities laws. For those that have never intended it for these purposes, they can feel more comfortable with a clear roadmap – something a good securities lawyer could or should have already laid out.

With differing opinions and an unclear road forward as of yet, ICO creators are beginning to tread more cautiously. Legal expertise in this area is still a rare area of specialization. CoinTelegraph continues to follow the road to regulation and bring you the latest developments.

Source: Cointelegraph