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SEC Pulls Its Punches in ICO Enforcement Action

At the beginning of the week, a Securities and Exchange Commission (SEC) enforcement action generated attention mostly by levying a large fine ($24 million) in the Initial Coin Offering (ICO) sector.  Many shrugged, seeing this as another example of regulatory hostility to cryptocurrency.

The reality is more nuanced.  The complaint itself is remarkably restrained. The details suggest strongly that ICOs may actually be approaching the mainstream in US capital markets. Let's look at the details.

1. Fine Size:  Yes, the $24 million is one of the largest fines assessed in the blockchain/cryptocurrency arena.  But in the broader context of the company puts the fine size in a slightly different perspective.  In a relatively short period of time (roughly one year), the company in question managed to raise "several billion" in digital assets.  Regardless of the denomination, this is an impressive fundraising feat.

The SEC press release indicates that some of the investors were in the United States.  But it does not provide perspective on how many of the investors were in the United States.  Nor does it provide perspective on how much they invested.  It is possible that the $24 million reflects the proportion of U.S. investors relative to other investors, but there is no concrete detail to support this supposition.

2.  Not Fraud:  The cause of action is for violating the registration, exemption, and disclosure portions of U.S. securities laws....not fraud.  In other words: this is a rather run-of-the-mill enforcement action.  

The enforcement action provides a potential factual basis for a cause of action in fraud.  It indicates that the company promised to spend over 1 billion raised in Ether from investors to build a blockchain platform that would have a positive impact on investors' ICO holdings. 

The enforcement order indicates that "urchasers thus would have understood that’s success in building and promoting the EOSIO software and promoting the launch of one or more EOSIO-based blockchains would make their token purchase profitable" but is silent on whether --or not -- the blockchain platform actually was built.  Even more positive for the ICO and cryptocurrency sectors, the SEC enforcement order does not attempt to suggest that creating a security in a cryptocurrency is automatically suspicious from a fraud perspective.

3.  Narrow Cease and Desist Order:  The enforcement action did not merely levy a fine.  It also issued a "cease and desist" order.  But since the violation is only one of registration and disclosure, compliance with the court order is fairly simple.  The company must register its ICO with the SEC and it must provide appropriate disclosures to investors. Alternatively, it can cease fundraising in the United States.  It is not required to close its operations.

4.  International Dimension:  Capital markets have become accustomed to seeing the SEC assert its jurisdiction abroad based on potential harm to investors and markets located inside the United States.  The current enforcement order fits well within that pattern. Consider these quotes from the press release:  “A number of US investors participated in’s ICO,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement.  “Companies that offer or sell securities to US investors must comply with the securities laws, irrespective of the industry they operate in or the labels they place on the investment products they offer.”  

One action does not create a trend.  It is possible that with headquarters in the Cayman Islands and a large investor base abroad the blockchain company presented limited threats to U.S. securities market integrity, providing the basis for the SEC to pull its punches in this enforcement action.  But it is also possible that blockchain companies and ICOs are becoming just another part of the securities market landscape in the United States, warranting a more measured response from the SEC.

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