> In light of the facts and circumstances, the agency has decided not to bring charges in this instance, or make findings of violations in the Report, but rather to caution the industry and market participants: the federal securities laws apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology.
Yes. The SEC is indicating that they're not going to apply this retroactively. Any upcoming Initial Coin Offering to US persons, though, is in trouble. Like all the ones listed here.[1]
I would not count on them not applying this retroactively. The DAO is safe (along with Bitcoin and Ethereum themselves) but everyone else is not. I've heard interviews with some ICO people and it's clear that they know what they're doing is legally questionable. They're doing it anyway because of the obscene amount of money on the table. The SEC will not look kindly on these people.
Are we sure Ethereum is safe? Bitcoin never did a premined token sale but the Ethereum Foundation did, so it looks much more like theDAO than Bitcoin does.
I think there might be a gotcha there. SEC rulings only apply to dealings within the United States. Being that Ethereum is [at least in general, if arguably not] decentralized, and largely pegged to a Canadian, and started in Switzerland it might not be so simple. The Ethereum Foundation itself is a Swiss nonprofit.
Of course, it remains to be seen what this will turn into. Even if it comes crashing down in the United States, that has little effect on the viability in the rest of the world... especially as of late.
I just wouldn't want to try and run an ICO in the US as a resident of the US!
It doesn't matter if Ethereum is a crypto-decentralized-blockchain-p2p-network-thingamagig. If the Ethereum Foundation sold their thing to US residents, it is under the purview of the SEC.
The only question is if the Ethereum Foundation's token sale passes the Howey Test. An analysis of this must be done like was done in their report of the DAO. I'm not qualified to do this analysis, which is why I ask. I know they said Bitcoin was not a security but that's all I know.
If you read the sec document carefully enough, they singled out the DAO because it's unambiguously a security. Shares in a thingymajig blockchain blah blah corp are still shares, therefore, securities. Most tokens are not shares and have uses other than profit motive, therefore, they are not securities
More like, if you read the SEC document carefully enough, you'll see that they applied the 4 prongs of the Howey test to theDAO token and defended each prong with arguments and evidence. They'll probably do the same thing for Ethereum (but not necessarily come to the same conclusion on each prong).
Saying "it has other uses than profit" is not sufficient since you'd have to back it up with meaningful evidence (what are the actual uses that investors are getting out of it?)
> Saying "it has other uses than profit" is not sufficient (does not address all 4 criteria) and you do not back it up with evidence (what are the actual uses that investors are getting out of it?)
This true, but the 4 criteria are an AND, not an OR.
Again, the Howey test and SEC rulings only apply to American entities/business. So, if it may impact the status of the Ethereum Foundation (barring all other questions) in the United States, but it won't impact it elsewhere at all except maybe in sentiment. Lately the United States' power of influence in economic matters has decreased, so I don't see that being a major deficit in the long run with regard to a technology that's being investigated and accepted internationally otherwise.
> SEC rulings only apply to American entities/business
This is wrong. SEC rulings apply as soon as your investors are US residents. [1] I know neither of us are lawyers, but at least back up what you claim if it might put people's money at risk.
Replying here because we reached max comment count.
I can see how our wires got crossed.
I interpreted your original comment as questioning whether or not this was a threat to the specific tech or foundation at large, and not just isolated to the US region.
So, I guess the argument is moot -- seems like my mistake. It's certainly up in the air in the US at this point. I do find the progression of events interesting, regardless. In spite of what I said, the US does have a social impact with decisions like this -- just maybe not so much right now as in recent years[0].
I get argumentative because I see a lot of promise. I like technical discussion about it vs. regular degradation, so I usually have something to say.
I see what you're saying: people not in the US should not be concerned. But that's not what the post is about and that's not what my question is about.
The question is whether or not what the Ethereum Foundation sold to US residents are securities in the SEC's eyes?
I'm not sure what you mean by "apply this retroactively". their legal argument for tokens being a security is established law. This press release has very little bearing on whether an company may or may not be prosecuted. Furthermore, ICO's are certainly not prima facie forbidden. The legal analysis will be a case by case basis, particularly asking whether a token would be considered an "investment contract".
Was thinking the other day: could someone prove by signing with some wallet keys or moving some coin that they control enough crypto wealth to be an accredited investor? Could you do an ICO that required that?
it's not just US persons. Germany has securities laws, France has securities laws, etc. I mean that German equivalent of SEC can go after those selling securities to Germans without following German securities laws
Serious question: Do you know any countries AT ALL that have no securities commission, or one that doesn't strictly regulate sale of securities, while at the same time the country allows formation of a company?
Being that token sales are international, it would seem there is absolutely nothing illegal about opening a company in that country and offering securities. Even if the owners of the company are US citizens. Then you have the company pay YOUR company as its main supplier, as opposed to its parent.
Israel does not regulate sales of securities to non-Israelis. This resulted in a huge binary option scam industry based out of Tel Aviv.[1] It got so big that it was 40% of Israel's financial sector. It became a political embarrassment for Israel. "Because this industry gives Israel such a bad name and inflames anti-Semitism, we must uproot the phenomenon." - Israel's top securities regulator. A law change is coming, and most of the binary options operators have already fled elsewhere. Cyprus and Bulgaria are popular.
For example can Israel's Securities Authority retroactively go after companies by classifying ICOs as securities? Or in this case, ALL securities can still currently be sold by Israeli companies to foreigners?
Also, what are the rules for Cyprus and Bulgaria? Where do you get the information about their popularity and their applicable securities laws?
> Being that token sales are international, it would seem there is absolutely nothing illegal about opening a company in that country and offering securities. Even if the owners of the company are US citizens.
Actually the US regulates companies that so much as offer securities to US citizens. Try getting an account with a forex broker that's based outside the US and you'll see what I mean. The CFTC doesn't limit itself to US companies.
I haven't seen the same attempts being made on other kinds of securities but the framework is clearly there as the CFTC is using it.
> or one that doesn't strictly regulate sale of securities
There's a reason why some crypto-companies (and not crypto actually) are based in the Cayman Islands (BitMEX), British Virgin Islands (Bitfinex), etc... Crypto Valley [0] in Switzerland is also gaining momentum. BTW, Fred Wilson wrote an interesting piece about this recently [1].
But the issue here is that if you plan to sell "tokens" to US nationals, you now know that you must play by the SEC rules. That or you shouldn't offer them to US individuals. Nothing rare about it, for instance CFDs [2] are financial instruments banned in the US, but traded without problems in the rest of the world. My guess is that ICOs will be like CFDs, offered around the world, but not to US citizens.
No, the issue is that it doesn't matter where you are based, if you offer securities to US persons, you have to abide by US securities laws. If you offer securities to Germans, you have to abide by German laws.
So once they realize they are securities this applies?
The main question is, are the exchanges considered foreign if the ICO is of a foreign company? How do you trade stuff if the securities are not transferrable?
What is an "unregulated company"? A bunch of geeks in a US basement could get prosecuted. A bunch of geeks in a non-US basement illegally selling unregistered securities to US persons might, too. And, if they did it personally instead of through a limited liability company of some sort, and they are found liable for their investors' losses, that will be a personal liability.
Something like a DAO contract that doesn't have an issuer (assuming the DAO had an issuer, not sure). Or a payout mechanism like zcash where the mining function pays out to founders wallets over time.
It seems inconsistent that ICOs are seen as securities whereas the underlying asset isn't. I think the differentiating factor is the degree of decentralization. If the SEC could shut down bitcoin they would. But they can't. So instead they'll go after ICO issuers who happen to be in the US. But many ICOs won't have to be in the US, or issued by humans for that matter.
Personally, the genie is out of the bottle. Value exists in the decentralized digital world, and it now has programmable properties. Trying to regulate securities has become the equivalent of regulating TCP packets. It can be done but at what cost..
> It seems inconsistent that ICOs are seen as securities whereas the underlying asset isn't.
I'm not sure why this would be inconsistent. I admit there's some confusion in the boundary between securities and commodities, but one can certainly have a hedge fund made up from currency or gold futures (neither of which is a security) and have ownership interest in the fund be a security.
(IANAL, none of this is intended to be advice or taken as authoritative.)
> But many ICO won't have to be ... issued by humans
If AIs are issuing ICOs, then I would imagine they would have to obey the law just like anyone else. Heck, very few if any securities are issued by humans -- they're mostly issued by corporations.
You could also think of bitcoin as an ICO. There's 21 million tokens that Satoshi sold, that people purchased with the expectation of profiting from. Boom, it's a security. If the financing model of a traditional blockchain is okay, but issuing tokens are not.. then programmers are about to get very creative with how get around loopholes.
> But many ICO won't have to be ... issued by humans
I mean the contract will be written by a person. But instead of having a central "issuer" (like a core team) the issuing mechanism is automated via the contract on the blockchain.
If a company makes a mistake, the SEC first goes after the company. "Unregulated company" sounds like "no company" [1]. In that case, the SEC goes straight after the individuals involved.
[1] Do you mean unregulated or unregistered? Unregulated means sole proprietorship. Unregistered could be an LLC or corporation that just never filed anything with the SEC.
This changes lots of things. You can't just open an DAO/ETH/BTC exchange, you need to be compliant with securities law and regulation. Those who operate as an exchange now but do not file the proper paperwork (which is expensive) should expect audits, fines, and shutdown.
AFAIK the SEC considers BTC a commodity but that doesn't mean it's unregulated. CFTC, IRS, FinCEN, and state regulations impose all kinds of restrictions on cryptocurrency that almost no companies are following.
No, they don't. That organisation only works in the USA, they can't do anything for 'the world'.
Let me clarify this: Just because the US SEC wants something doesn't make it happen on the internet. They can do things with governments and companies, and that's about it.
If some random hacker in Ukraine decides to use a ETH or BTC or smart contract or create a new coin, the SEC isn't going to be able to influence that. There is no point of control there.
Good luck building the "economy of the future" without the US banking system. There is a reason banking sanctions are the US's most powerful non-military diplomatic tool.
If you want to build an economy of the future using the banking system, you already have a much better option.
And that much better option is to just use the regular banking system.
Cryto currencies have massive costs and disadvantages, and there is no point at all to them if you take about the fundamental premise and purpose of them, which is decentralization.
Are they obliged to check this, though? The only checks I've ever seen are making investors tick a box on a webpage to confirm that they aren't a US citizen. Is that good enough, or are these ICOs expected to do more thorough checking?
Some ICOs have advertised their sales in the US, I wonder if the SEC will look on that as offering their tokens to US citizens, whatever the wording they put on their websites?
> In light of the facts and circumstances, the agency has decided not to bring charges in this instance, or make findings of violations in the Report, but rather to caution the industry and market participants: the federal securities laws apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology.