Initial coin offerings (ICOs) and the attorneys who advise they’re entitled to an exemption from securities registration were read the riot act by Securities and Exchange Commission Chairman Jay Clayton at the 2018 Securities Regulation Institute on Monday.
Bitcoin tumbled below $10,000 on Tuesday and is now down 25% to a low of $9,972 since the beginning of the year, according to CoinDesk’s bitcoin index.
“I have instructed the SEC staff to be on high alert for approaches to ICOs that may be contrary to the spirit of our securities laws and the professional obligations of the U.S. securities bar,” Clayton told the attorneys and regulators at his speech.
“First and most disturbing to me, there are ICOs where the lawyers involved appear to be, on the one hand, assisting promoters in structuring offerings of products that have many of the key features of a securities offering, but call it an ‘ICO,’ which sounds pretty close to an IPO,” Clayton said.
These attorneys claim the ICOs are not securities and as a result the promoters proceed to offer the “coins” without compliance and investor protection, the nation’s top securities cop said.
Also problematic, Clayton said, are ICOs where the lawyers appear to have taken a step back from the key issues, especially where registration would likely be warranted.
“These lawyers appear to provide the ‘it depends’ equivocal advice, rather than counseling their clients that the product they are promoting likely is a security. These clients then proceed with the ICO without complying with the securities laws because those clients are willing to take the risk,” he said.
Clayton said he is also concerned with the legality of some distributed ledger or blockchain offerings.
“I doubt anyone in this audience thinks it would be acceptable for a public company with no meaningful track record in pursuing the commercialization of distributed ledger or blockchain technology to: one, start to dabble in blockchain activities; two, change its name to something like ‘Blockchain-R-Us;’ and three, immediately offer securities without providing adequate disclosure to Main Street investors about those changes and the risks involved,” Clayton said.
As a result, the agency “is looking closely at the disclosures of public companies that shift their business models to capitalize on the perceived promise of distributed ledger technology” and whether the disclosures comply with the securities laws, particularly in the case of an offering,” Clayton added.