The SEC’s tightening regulations on crypto exchanges have been felt in the markets for the past two months. If you asked me, the crypto market performance has been dismal to say the least. Every major currency has been reduced to its lowest levels in a while.
The SEC issued dozens of subpoenas and information requests to technology companies at the end of February. The authorities stated that they were looking to crackdown on fraudulent ICOs that may have been violating securities laws.
The news sent shockwaves through the markets. The cryptocurrency lovers believed that they had found the perfect, decentralized system that got rid of government control on their money. They believed that they would live happily in a regulations-free society where the government would not be able to manipulate their digital currency.
Concerns from the SEC
Officials stated that SEC had been watching ICOs that were raising money for businesses that didn’t even exist. The SEC has strict policies and guidelines for businesses looking to raise finance through initial offerings. One of their requirements is that ICOs should register with the agency just like any company looking to raise funds through an IPO.
Apart from shady business operations, SEC is also concerned about tax evasion issues. The agency brought charges against a Texas-based offering in January. The ICO had used the former boxing legend Evander Holyfield to endorse them and claimed that it raised more than $600 million in funding.
The SEC was originally formed in 1934 to protect investors from potential fraud and scams in the financial markets. Over the course of time, they have developed strict guidelines and policies for new business ventures to follow.
ICO are very similar to the traditional method of raising finance through an IPO. It was only a matter of time before the agency would take note of what was going on and make registration compulsory.
Who is Affected?
The subpoenas and charges will affect a number of stakeholders associated with the ICOs targeted by SEC.
Management: These include the executives, directors and founding members of the ICOs in question. Very few ICOs have registered with the SEC probably because no one ever thought the government would get involved in the industry.
Developers: Individuals responsible for creating the platforms and designs are also considered implicit. If the ICO is not registered with the SEC, any payments received for rendering design and development services are also illegal.
Promoters: These include marketing firms, news sites and endorsers who received payment for promoting the ICO and helping it raise the money.
Advisors: Most ICOs were launched with endorsements from technical experts who agreed to take on advisory roles in the Cryptocurrencies in exchange for coin payments. Receiving commissions from an ICO would be illegal if it has not been registered.
Platforms: Cryptocurrency exchanges cannot list a currency where the ICO has not been registered with SEC. Any commissions received by such platforms would also be illegal.
What Can The ICOs Do?
I am not a lawyer, but the most obvious solution for ICOs seems to be rescission. The law allows for a company to offer rescission to its investors if securities were not originally sold properly.
A company that has been doing well since its ICO launch has very little to lose in this situation. This is true for more than 90% of the cryptocurrencies that have been operating in the markets for more than one year. The value of coins for a majority of blockchain-based startups is higher than where they started at.
If the investors choose to accept the rescission offer and take their money out, the company can easily sell their coins to different investors. If the investors choose to stick with the company they would forego any future claims to SEC violations. This is a win-win situation for companies that launched through ICOs, in my view.
The company management would obviously need to get in touch with lawyers who are expert at SEC and company law to formulate a proper strategy. You would also need someone with expertise in Blockchain technology in your team.
This is where we can help. Blockchain Developers have been involved in fintech for a long time. Our experienced team can guide you on how to deal with SEC regulations and help design the rescission process if that is the route you chose to go.
Things Can Become Tricky
Companies that have already been in operations for more than a few months might find the situation more difficult to solve. Even offering the investors the option of rescission may not solve their problems.
This is because businesses may have received investments from non-accredited investors. These investors are much more difficult to track and require special provisions for rescission.
The company would need to file its rescission request under Regulation Crowdfunding or Regulation A+. It is not clear if the SEC would allow this, but it couldn’t hurt to ask them.
Individuals and companies that have been involved in an ICO might find themselves embroiled in a long litigation process with SEC and U.S. Justice Department. They can possibly be charged with fraud, misrepresentation and illegal business practices. Lengthy lawsuits could take businesses away from focusing on core business operations.
In case of losing the court battle the business may end up being charged with heavy fines as well as paying back damages to their investors. Individual directors, promoters and facilitators may also get punished with incarceration.
What the Future Holds
The SEC move to send subpoenas and make inquiries of certain ICOs is just the beginning. Many Crypto experts believe that SEC will increase its investigations to all the ICOs that are not registered with the agency. This means more than 90% of the ICOs will be questioned sooner or later.
Some companies have already started hiring legal counsel and looking for options like rescission. New ICOs would also do well to file with the Commission to be compliant from day one.
Government regulations are here to stay. Whether companies choose to implement them voluntarily from the beginning, or after a lengthy court battle will be decided in the next few months.