The statement serves as a warning directed to both “Main Street” investors and market professionals and concludes that most tokens sold in ICOs to date are likely securities under US law.
Warning to “Main Street” investors: ask questions, demand answers
Clayton begins his statement with a general warning on cryptocurrency and ICO markets directed towards “Main Street” investors, including basic advice to potential investors, such as “please ask questions and demand clear answers.”
He also notes the particular risks of investing in crypto and ICOs, notably the fact that invested funds are often moved overseas. As Clayton warns, this makes it harder for national regulatory bodies, such as the SEC, to protect investors from fraud and “bad actors.”
To market professionals: a security is a security, no matter what you call it
The second section of Clayton’s statement is addressed to market professionals, including securities lawyers, accountants and consultants, and emphasizes their responsibility to protect investors. He encourages professionals to carefully consider each asset case, whether it’s called a token, currency or coin, to determine whether or not it is a security in the US.
Clayton notes that the content of the transaction is more important than the form in determining if an investment is a security. Whatever a token, coin or currency is called, each one must be looked at on a case by case basis to determine its status under US securities laws. As follows, assets determined to be securities in the US must register with the SEC to comply with US law or face the consequences.
According to the SEC, an offer would be considered a security if it is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.”
In Clayton’s view, most tokens offered in ICOs to date fall under this definition, whether or not they have “utility” functions as well:
“By and large, the structures of initial coin offerings that I have seen promoted involve the offer and sale of securities and directly implicate the securities registration requirements and other investor protection provisions of our federal securities laws. Generally speaking, these laws provide that investors deserve to know what they are investing in and the relevant risks involved.”
Despite this fact, so far no ICOs have registered with the SEC, as Clayton points out.
The conclusion: ICOs could be a good thing, but must be regulated
It is worth noting that Clayton begins his address to market professionals with a positive statement on ICOs, saying:
“I believe that initial coin offerings – whether they represent offerings of securities or not – can be effective ways for entrepreneurs and others to raise funding, including for innovative projects.”
However, he then goes on to detail the particular risks of investing in ICOs. As investing in both ICOs and cryptocurrencies proliferates, the SEC will remain committed to enforcing securities laws in the US. On the topic of enforcement, Clayton stated:
“I have asked the SEC’s Division of Enforcement to continue to police this area vigorously and recommend enforcement actions against those that conduct initial coin offerings in violation of the federal securities laws.”
What all this means for investors
Bottom line, Clayton’s statеment is a plea to all investors to use caution and common sense when in investing in cryptocurrency and ICOs. Ultimately, however, the SEC governs only US citizens, so Clayton’s warnings apply specifically to either US investors or companies or those looking to transact with US citizens.
Back in July, the SEC reminded investors that they themselves are also responsible for complying with US law: in order to legally invest in unregistered securities, US securities laws require you to be an accredited investor or meet certain net worth or income requirements.
The SEC’s latest conclusion that most tokens sold in ICOs to date are securities under US law means that ICOs based outside the US will likely continue to forbid US citizens from participating in their token sales in order to avoid the question of SEC registration.
On the other hand, in order to legally include US citizens in their fundraising efforts, perhaps ICOs will finally begin to register with SEC, when necessary.