In an interview with Fox Business, SEC Chairman Jay Clayton reiterated that a significant portion of the ICOs that he has observed qualify as securities offerings, even though they are marketed as utility token sales and claim that they are exempt from securities regulations.
Clayton said:
“Many ICO’s and many of the ones I’ve looked at specifically are securities. They are offerings of interest in an enterprise where the buyer of the ICO of the token, you can call it a token you can call it a security, is basically saying I’m investing with you with the promise of a future return, whether you deliver something to me in the future as a result of your efforts or because I sell it to somebody else who wants that return in the future. That’s a security, and the SEC’s job is to regulate the offer and sale of securities.”
These are among the SEC chairman’s first public statements on this nascent fundraising model since reports emerged that the agency had issued subpoenas to as many as 80 ICO operators, demanding that they turn over documents related to their token sales.
The SEC is also investigating other offerings — including that of tZero, a subsidiary of e-commerce company Overstock — although these companies have reportedly been asked to hand over documents voluntarily.
In a lengthy exchange, Clayton detailed one of the SEC’s chief problems with the state of the ICO markets, namely that issuers appear determined to “break down [the] traditional approach to public and private markets.” He explained that under SEC guidelines, securities issuers may choose to either conduct their offering as a private placement or as a public offering. Most ICOs, he said, have tried to do both.
“For some reason, people selling ICOs seem to think they don’t need to follow either path they seem to think they can have the best of both worlds. A limited disclosure from a private placement and public trading and public offering of the token. For a long time, since 1933 that’s not been allowed,” Clayton said. “Although I love this new technology the new technology is not a reason to break down our traditional approach to public and private markets.”
Meanwhile, a newly-released letter drafted by an official with the Department of the Treasury suggests that ICOs may also have to register as money transfer businesses, which would subject them to the Bank Secrecy Act and other regulations that, if violated, incur criminal penalties.
Clayton advised investors to “think long and hard” before contributing to ICOs that do not explicitly demonstrate their compliance with SEC regulations, noting that there is little the agency can do to protect investors once the money moves offshore.
But for ICO operators, he had a more explicit admonition:
“Abide by the law,” he warned, “we are watching, others are watching.”