On Thursday, June 14th, the SEC Director of Corporation Finance, William Hinman, stated his view that current secondary market trades of Ether are not now securities transactions as part of a speech on the treatment of digital assets under the securities laws.  While he expressly set aside the question of whether the capital-raising that initially accompanied the sale of Ether in 2014 was a securities offering, he confirmed previous suggestions that Ether is a prime example of a digital asset that may once have been offered as a security, but is now “something else” that is not  regulated by the securities laws.  While Hinman’s views are not binding on the Commission, his remarks strongly suggest the Commission’s willingness to consider whether certain digital assets that may be initially offered as securities over time can later lose their status as securities—a view that is shared by at least one CFTC commissioner.  Continue Reading SEC Director of Corporation Finance States That Secondary Market Sales of Ether Are Not Securities Transactions Now, but “Something Else”

On March 27, 2018, Massachusetts Secretary of State William Galvin announced that the state had ordered five firms to halt initial coin offerings (“ICOs”) on the grounds that the ICOs constituted unregistered offerings of securities but made no allegations of fraud.  These orders follow a growing line of state enforcement actions aimed at ICOs.

This was not Massachusetts’s first foray into regulating ICOs.  On January 17, 2018 the state filed a complaint alleging violations of securities and broker-dealer registration requirements against the company Caviar and its founder for an ICO that sought to create a “pooled investment fund with hedged exposure to crypto-assets and real estate debt.”

Continue Reading Massachusetts Orders Five Companies to Halt ICOs as States Step Up Enforcement Efforts

Part 3: Developments in the United States and the Rising Tide of Enforcement

In 2017, the use of initial coin offerings (“ICOs”) as an alternative means to raise capital took off worldwide. By the end of the year, ICO sponsors raised over $5.6 billion globally through token offerings.[1] At the same time, U.S. regulators’ focus on ICOs has rapidly expanded as well. Since releasing the DAO Investigative Report in July 2017 (the “DAO Report”), the U.S. Securities and Exchange Commission (the “SEC”) has steadily increased its focus on ICO activity. As exemplified by numerous investor advisories, the creation of the Cyber Unit within the Enforcement Division with the purpose to halt and deter cyber-related misconduct in the securities markets, enforcement actions against ICOs, and the Office of Compliance Inspection and Examinations’ (“OCIE”) announcement that monitoring ICO sales will be one of its top 2018 priorities, it is clear that the SEC views ICOs as squarely within the scope of its mandate for regulation and enforcement. Unsurprisingly, state enforcement actions and private class action litigation targeting ICOs are also on the rise. Continue Reading Around the World in ICOs: ICOs in the United States

The Directive states that “in light of modern advances”, it is important “for reasons of clarity and rationality” to “apply uniform rules that are as strict as possible”. Indeed, the regulatory regime established by the Directive is of considerable rigour: it contains detailed registration, disclosure and marketing requirements. We are, of course, referring to the EU Potatoes Directive (2002/56/EC). When it comes, however, to initial coin offerings (“ICOs”) of cryptographically encoded digital “tokens” to retail investors via distributed ledger technology – almost anything goes! At least, that appeared to be the case until recently, when a multitude of EU regulators issued warnings and statements on the application of EU regulations to ICOs.

In this post, we seek to decipher some of those statements and offer some practical observations to determine how EU securities laws might (or might not) apply to ICOs. Continue Reading Around the World in ICOs, Part 2: Catching up With Potatoes? The Regulatory Response to ICOs in the EU so Far

This past week, we received further evidence that U.S. federal regulators will continue to scrutinize potential compliance issues in virtual currency trading and initial coin offerings (“ICOs”) under existing law. However, the key takeaway is that the U.S. regulators, so far, are doing so under established interpretations of their existing authority. In our view, none of these events should be construed either as establishing a new regulatory framework or as a significant expansion of prior regulatory authority.

Please click here to read the full alert memorandum.

Further to its consultation on potential legal framework of Initial Coin Offerings (“ICOs”) (the “Consultation”), the French Autorité des Marchés Financiers (“AMF”) published on February 22, 2018 a summary of the responses received.[1]

The majority of respondents favor an optional authorization regime for ICOs, which is seen as a balanced and pragmatic approach.

  • Initiators of ICOs targeting French investors would obtain a visa from the AMF subject to satisfying certain conditions and providing guarantees to investors.
  • An offer launched without visa would not be illegal but would contain a warning informing potential investors that they have not received an authorization and that is a risky transaction. Failing such warning, tokens offers would give rise to sanctions.

Continue Reading AMF Consultation on ICOs – Initial Feedback

On October 26, 2017, the French Autorité des Marchés Financiers (“AMF”) launched a consultation on Initial Coin Offerings (“ICOs”) and the potential regulation of such offerings (the “Consultation”). The Consultation was opened as of October 26, 2017 until December 22, 2017. It is expected that responses to the Consultation will be published during the first quarter of 2018 and a final position will be issued thereafter.  In addition, the AMF advises all market participants contemplating an ICO offering to inform and liaise with the AMF with respect to the ICO project and white paper in advance of the launch.

In parallel with the launch of the ICO consultation, the AMF announced the launch of a new sandbox called UNICORN (for “Universal Node to ICO’s Research & Network”), which is a support and research program focusing on digital asset fundraising and, specifically, financing based on blockchain technology. The program aims to provide a framework allowing initiators to develop transactions while ensuring the protection of buyers and other market participants.  The AMF will meet with initiators (French or foreign entrepreneurs and their advisors) as well as academics and intends to publish an initial impact analysis of these new forms of financing by the end of 2018. Continue Reading The AMF Consults on Potential Legal Framework for ICOs and Launches Digital Asset Fundraising Sandbox

On February 6, 2018,  Chairman Clayton of the Securities and Exchange Commission (SEC) and Chairman Giancarlo of the Commodity Futures Trading Commission (CFTC) testified before the Senate Banking Committee (the Committee) on their agencies’ oversight role for virtual currencies.  Consistent with his prior statements, Clayton took a strong stance on SEC regulation of Initial Coin Offerings (ICOs).  But, when it came to cryptocurrencies themselves, he and Giancarlo struck a somewhat more circumspect tone.  In particular, despite acknowledging that their existing jurisdiction does not extend to spot transactions in cryptocurrencies, the Chairmen did not yet seek additional regulatory authority.

However, Chairman Clayton particularly expressed concerns about whether virtual currency exchanges provided adequate protections for investors and whether state regulation as payment services was sufficient.  While the Chairmen did not request new authority, it is clear that there would be support within the Committee for legislation in this area, and Clayton and Giancarlo committed to work with each other and other authorities (including bank regulators and law enforcement authorities) to develop an appropriate approach.  When the Chairmen of the SEC and CFTC express that they are “open” to exploring whether increased federal regulation is needed, there is a clear message. Continue Reading SEC and CFTC Testimony on Virtual Currencies: Is More Regulation on the Horizon?

Recent media reports, including in State-connected media, suggest that China is about to block access to all cryptocurrency trading platforms, including those operating overseas.  In September 2017, the People’s Bank of China (“PBOC”) and six other government agencies jointly issued guidance  immediately banning fundraising through offerings of tokens, such as initial coin offerings (“ICOs”), and requiring the closure of cryptocurrency exchanges in China by the end of September 2017.  Continue Reading Chinese Government Moves To Effectively Ban Cryptocurrency Trading

Part I: The Basics

Everyone is talking about “ICOs” or “initial coin offerings.”  Celebrities are tweeting about them.  You cannot open the Wall Street Journal or Financial Times on any given day without at least one story about ICOs.  Prominent CEOs of financial institutions have taken to the bully pulpit to fulminate about ICOs and cryptocurrencies, using words such as “bubble” and “fraud.”  Parallels are drawn to 17th century tulip mania.  And securities and financial regulators around the world are taking notice, with varying degrees of reactions.

But why have ICOs elicited such attention?   In this series of posts, our aim is to shed light on this innovative way of raising funds, the regulatory responses (thus far), the challenges to regulation in various jurisdictions, the factors motivating regulators and possible future actions by regulators. Continue Reading Around the World in ICOs: A series examining regulatory responses to ICOs