The U.S. Securities and Exchange Commission, which regulates federal securities laws, has been issuing subpoenas since 2017 to cryptocurrency companies who have launched ICOs. This process was described to The Wall Street Journal by four unidentified sources who had seen the confidential legal documents. The Journal reported on the subpoenas on Feb. 28, 2018.
A security is a tradeable financial asset, such as a stock. When a company sells its shares, the stock market launch is called an IPO (Initial public offering). When a cryptocurrency company wants to raise money in a similar process, it is called an ICO (initial coin offering). Cryptocurrencies are digital monies secured through cryptography (encrypting and securing data from uninvited parties). They are bought and sold through specialized online exchanges, not traditional banks. Bitcoin and Ethereum are two of the most well-known and valuable types of this digital money, and both rely on blockchain technology. Blockchain technology, in essence, consists of a decentralized network or ledger; it’s secured data are distributed on multiple computers rather than organized in a central base or hub.
The virtual currency companies sell their own unique coins during the ICO. Many of these function within the Ethereum blockchain. Because these coins do not use common banking methods, their creation, sale and trade have been largely unregulated in the U.S. It is estimated that companies raised between $3 and $5 billion through ICOs in 2017, according to crypto-focused sites such as Coindesk and Coinschedule. The SEC is now stepping in to increase oversight of these transactions.
Up to 80 companies and individuals including advisers and attorneys for those businesses have reportedly been subpoenaed. The subpoenas were sent by SEC offices in multiple locations including San Francisco, New York and Boston. They requested information on how the cryptocurrency companies’ ICO sales and pre-sales were organized, structured and marketed as well as the identities of the ICO investors.
SEC Chairman Jay Clayton has repeatedly expressed that he thinks the coins sold in ICOs should be considered securities and regulated accordingly. While speaking to the Senate banking committee in early February, Clayton said zero ICOs had registered with the SEC. He has also said that he considers many ICOs illegal and does not think their non-adherence to security laws is accidental.
“Those who engage in semantic gymnastics or elaborate structuring exercises in an effort to avoid having a coin be a security, are squarely in the crosshairs of our enforcement provision,” he stated.
Some ICOs have been outright frauds, with companies disappearing with investors’ money at the close of the sale. Others have proven to be successful for both sellers and buyers, such as the 2014 Ethereum ICO, which raised $18 million in 42 days. Ethereum is now the second most valuable digital coin with a market cap or total value of about $84 billion as of March 3, 2018. There are multiple guides online intended to advise potential ICO participants as to the possible hazards, precautions and rewards associated with this burgeoning field of investment.