Appcoins, Crypto Crowdfunding, and the Potential SEC Regulation Pitfall

A quick scan of any popular cryptocurrency forum will reveal numerous announcements for crowdfunding campaigns intended to support the launch of a new altcoin or decentralized application.

In these crowd sales, digital tokens associated with the application (called “appcoins”) are sold to early adopters in an effort to raise capital for the new project. The hope of many who purchase appcoins in a crowd sale is that the price of the coin will go up significantly if the application becomes widely adopted.

In response to these crowdfunding campaigns, some have warned that certain appcoins seem to have the characteristics of a security that may be subject to regulation by the Securities and Exchange Commission (SEC). Although many, including the developers, may prefer to ignore these warnings, they do so at their own risk. The SEC’s regulatory powers apply broadly and are very restrictive, and recent reports indicate that the SEC has already started to turn its focus to the so-called Crypto 2.0 marketplace. This article provides a basic overview of the legal definition of a security and then discusses the aspects of appcoins that may trigger the SEC’s interest.

The legal definition of a security

Securities offered in the U.S. generally must be registered with the SEC and meet many legal requirements. As a threshold matter, the securities statutes define the term “security” very broadly. The definition covers a list of specific instruments, like stocks and bonds, but also covers more vague concepts like “investment contracts” and “instruments commonly known as securities.”  This broad definition has been interpreted to mean that what is considered a security is not limited only to formal instruments traded on securities exchanges. Rather, according to the U.S. Supreme Court, the legal definition of a security also extends to “uncommon and irregular instrum