The SEC recently defined several more crypto industry parameters. Specifically, the Commission answered a few questions affecting the classification of “dealers,” “brokers,” and “security assets.”
Main Takeaway from the SEC’s End-of-Year Cryptocurrency Memo: Register or Else!
The main takeaway from the SEC’s latest crypto statement: Don’t skirt licensing and registration requirements via creative marketing. The memo reminds participants to follow the Commission’s “well-established and well-functioning federal securities law framework when dealing with technological innovations.”
Fintech-Defining Laws
Registration and licensing violations are the number one cause of SEC actions against ICOs. The story usually goes something like this: An ICO doesn’t think it needs to register or obtain professional licenses, but the commission disagrees.
When analyzing the regulatory status of an ICO, the SEC relies on three main laws: the Investment Company Act, the Securities Exchange Act, and the Advisers Act.
The Investment Company Act outlines a regulatory registration framework for “pooled vehicles that invest in securities.” In this latest memo, the SEC made it clear that “pooled investment vehicles” include digital offerings.
It also mentions the Investment Advisers Act. Commissioners highlighted a hedge fund that had invested more than 40 percent of its assets in digital securities and offered a “public offering of interests.” The SEC took issue with the fund’s structure and the principals’ failure to register properly. Moreover, since the fund manager qualified as an “investment advisor” under the Investment Advisers Act, officials deemed his marketing statements about the fund’s viability and compliance status misleading under the law’s provisions.
A Few ICO Registration Guidelines
- Every exchange platform should register with the SEC or risk an expensive action. The only exceptions are operations that have communicated with the SEC — either directly or through an attorney — and secured an exemption.
- Any person that facilitates “the issuance of digital asset securities in ICOs” or any other secondary token trading is likely to be considered a “broker” or “dealer” and therefore required to register with the SEC and join a self-regulatory organization like FINRA.
- If you provide a way for token sellers and investors to connect, then there’s a 99 percent chance you need to register with the SEC or risk a forced shut down.
- Some platforms can look into operating as an Alternative Trading System (ATS). Speak with a cryptocurrency attorney to determine eligibility.
- The SEC’s memo reads: “A functional approach (taking into account the relevant facts and circumstances) will be applied when assessing whether a system constitutes an exchange.[15]The activity that actually occurs between the buyers and sellers—and not the kind of technology or the terminology used by the entity operating or promoting the system—determines whether the system operates as a marketplace and meets the criteria of an exchange under Rule 3b-16(a).” In other words, function trumps marketing and positioning. Just because you call your business or product something else, doesn’t mean it’s not an exchange or security; nor can individuals who facilitate exchanges ignore professional registration requirements. What matters is how the SEC sees you, not how you define your role.
The SEC Isn’t Against Cryptocurrencies and Blockchain, Just Cautious
Some crypto enthusiasts think regulations will help the market; others believe they’re a death knell to innovation. Arguably, the Securities and Exchange Commission is straddling both viewpoints. While commissioners clearly see blockchain’s potential market benefits, they also recognize the possible downsides and feel it’s their duty to protect investors against fraud and industry growing pains.
Punishments For Failure To Properly Register
Failing to register with the SEC can land you more than just a slap on the wrist. Some ICOs have gone belly up thanks to the SEC’s crushing fines. In many cases, the Commission also insists that the startup return investor funds.
Connect With A Cryptocurrency Lawyer To Get The Right Answers To Your ICO Questions
The cryptocurrency market is booming, but the laws and regulations governing the space are still murky. If you don’t want to get caught in Uncle Sam’s cross-hairs, then work with an attorney who knows the industry. As the SEC advises: “Consult with legal counsel concerning the application of federal securities laws.”
The Gordon Law Group regularly works with ICOs and blockchain businesses on everything from contract negotiations to compliance. We also represent companies who find themselves entangled in an SEC or IRS web.
Are we the right firm for you? There’s only one way to find out: Get in touch. We’ll chat about your situation and determine if we’re the right fit.
