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”

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

Following the December 2017 listing of futures contracts based on Bitcoin by two exchanges regulated by the Commodity Futures Trading Commission (CFTC), several fund sponsors and securities exchanges applied to the Securities and Exchange Commission (SEC) to list exchange-traded funds (ETFs) that would invest in those futures contracts.[1]  By investing in futures contracts regulated by the CFTC, instead of Bitcoin itself, these ETFs seemed designed to address concerns that had previously led the SEC to deny applications to list ETFs linked to Bitcoin.  This change was not sufficient, however, as the SEC raised new concerns in early January that led to the withdrawal of these new applications.[2]   Exchanges, ETF sponsors and investors are now left wondering:  what will it take for an ETF linked to Bitcoin to pass muster with the SEC? Continue Reading SEC Requests Withdrawal of Bitcoin Futures ETFs

The SEC has recently signaled an increased concern with the offerings and marketing of Initial Coin Offerings (“ICOs”),[1] which should be of interest to companies and institutions involved with ICOs.  On November 1, 2017, the SEC Division of Enforcement and Office of Compliance Inspections and Examinations (“OCIE”) jointly issued a public statement warning celebrities and other influencers promoting Initial Coin Offerings (“ICOs”) about potential violations of a host of federal securities laws, including the anti-touting and anti-fraud provisions of the federal securities laws.  Specifically, the public statement noted that endorsements may be unlawful if they do not “disclose the nature, source, and amount of any compensation paid, directly or indirectly . . . in exchange for the endorsement.,” and that endorsers may also face liability for potential violations of the anti-fraud provisions, for participation in an unregistered securities offering, and for acting as unregistered brokers.  The public statement also noted that investment decisions should not be based solely on an endorsement and cautioned that “celebrity endorsement may appear unbiased, but instead be part of a paid promotion.”  The public statement follows an investigative report issued by the Division of Enforcement on July 25, 2017, which announced that blockchain technology-based coins or tokens sold in an ICO may be a form of security under the Securities Act of 1933 and the Securities Exchange Act of 1934. Continue Reading The SEC Warns That Celebrity Endorsements of Virtual Currency May Violate Federal Securities Laws

On Monday, December 4, 2017, the U.S. Securities and Exchange Commission (SEC) obtained an emergency order from a U.S. District Court in New York to enjoin an allegedly fraudulent initial coin offering scheme.  The SEC’s complaint alleges that Dominic Lacroix, a recidivist securities law violator, and his company PlexCorps violated the anti-fraud and registration provisions of the U.S. federal securities laws in collecting up to $15 million in investor funds purportedly in exchange for digital tokens and promised returns in excess of 1,000% in 29 days.  The complaint also charges Lacroix’s partner Sabrina Paradis-Royer with securities fraud.  Among other relief, the district court has granted the SEC’s request to freeze the defendants’ assets. Continue Reading Newly Created SEC Cyber Unit Takes First Action Against Allegedly Fraudulent ICO

The Securities and Exchange Commission (the “SEC”) recently sent a warning to the burgeoning market for initial coin offerings (“ICOs”): assets that exist only on the blockchain may be securities subject to registration, anti-fraud and other requirements under the U.S. federal securities laws.  The outcome of the SEC’s analysis was unsurprising, representing a reasonably straightforward application of longstanding securities law principles.  However, the SEC’s discussion left several key questions and potential paths forward for ICO issuers and other participants in the ICO marketplace to consider. Continue Reading Open Questions and Potential Paths Forward Following the SEC’s Analysis of Digital Assets as Securities

Overstock.com, Inc. (“Overstock”) recently filed a shelf registration statement with the Securities and Exchange Commission (the “SEC”) allowing for the issuance of “digital securities.”[1]  The SEC declared that registration statement effective on December 9, 2015.   The digital securities described in Overstock’s registration statement will be evidenced only by entry into a publicly distributed ledger and transfers of the digital securities can only be effected on that ledger.  They will not be evidenced by physical certificates or notes, recorded in book-entry system of the type typically used by issuers and transfer agents today, traded through a traditional securities exchange or cleared through an established clearing system.    Instead, ownership of digital securities and trades will be reflected in a publicly distributed proprietary ledger maintained by an alternative trading system (“ATS”) run by Pro Securities LLC using the technology of tØ, a subsidiary of Overstock.  In June 2015, Overstock completed the first placement of corporate bonds in the form of digital securities pursuant to Rule 506(c) of Regulation D using the technology of tØ. Continue Reading Bitcoins and Blockchain – The Use of Distributed Ledger Technology for the Issuance of Digital Securities