Securities & Exchange Commission Takes a Stand on ICOs

By: Ariel Meilch

Ariel Meilich, Project Lead at Decentraland

Ariel Meilich, Project Lead at Decentraland, a soon to be launched virtual reality platform powered by the Ethereum blockchain responds to the statement by the U.S. Securities & Exchange Commission (SEC) regarding Initial Coin Offerings (ICOs) as potential regulated financial instruments.

Meilich was previously a cryptoanalyst at Charles River Ventures, a leading Silicon Valley venture fund, and  Founder of Benchrise, a big data company whose product helped find software engineers for technology companies.

Before entering the world of tech, Meilich spent two years as a National Institute of Health fellow, performing neuroscience research on human decision-making, while running a BPO agency that catered clients such as Amazon and General Electric.

SEC Takes a Stand on ICOs

2017 has witnessed a sea of start-ups ditch the traditional VC model and turn towards a new form of capital raising: the Initial Coin Offering (ICO). Dozens of companies have raised millions or even hundreds of millions of dollars through ICOs, and in many cases, from ordinary investors.

On July 25th, the SEC released a statement outlining much needed regulatory clarity for ICOs, which have accumulatively raised over $1 billion in capital.

The SEC’s decision aimed to support blockchain-based financial innovation while keeping investors and the cryptocurrency market’s best interest in mind.

The SEC’s announcement specifically analyzed tokens sold by The DAO, a ‘virtual’ organization that raised money to invest in other projects. The SEC ruled tokens offered and sold by The DAO are classified as securities, and therefore fall under federal securities laws.

The organization emphasized that federal securities laws apply to all securities in the U.S., whether the issuing entity is a traditional company or a decentralized autonomous organization, and whether the securities are purchased using fiat or digital currencies.

Fortunately, the SEC noted that each individual ICO and token issuance is different, meaning that not all are listed as securities. Therefore, each event must be examined on a case-by-case basis to make a proper ruling. The SEC report recognized that whether or not a token should be labeled as a security depended on the “economic realities of the transaction.”

While some coins will be classified as securities, others may be looked at as subway tokens that grant owners access to a network. The SEC’s clarification on ICOs is a testament to the growth and adoption in the cryptocurrency space. Increased regulatory clarity will drastically benefit valid ICOs, and eliminate patchy projects.

In the future, token sales will stand firm and create a lot of value, and even partially replace early-stage equity investing. For this phenomenon to benefit all parties, we must set the bar high and invest only in companies with working prototypes and a track record building software.

Increased regulatory clarity will help companies looking to issue tokens pass the Howey Test, a key determiner of whether something should be considered a security, and thus subject to SEC regulation. While more clarity is still needed, this is still a major step in the right direction for the crypto and blockchain industry.