According to SEC’s latest announcement, Bitcoin and Ether have been ruled out as securities due to its decentralized nature
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William Hinman, Director of The Division of Corporate Finance, gave a speech at Yahoo Finance All Markets Submit in San Francisco to address the status of digital assets. As published on SEC.gov, Hinman questioned about the state of digital assets: “Can a digital asset that was originally offered in a securities offering ever be later sold in a manner that does not constitute an offering of a security?” While the answer is “no” for digital assets, ICOs and token sales are considered securities.
Promoters, in order to raise money to develop networks on which digital assets will operate, often sell the tokens or coins rather than sell shares, issue notes or obtain bank financing. But, in many cases, the economic substance is the same as a conventional securities offering.
We have come a long way after a months’ speculation since my last Steemit post on SEC’s ruling for Ethereum’s asset classification. The announcement confirms that Ethereum joins the ranks fo Bitcoin to be a commodity based digital asset, providing a hedge on traditional financial tools and also works a digital currency.
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The debate is focused on ICOs, as their ideas stem from companies trying to promote and sell their potential to start a new project. Even though tightly linked to the blockchain, thr companies’s success does not rely on the blockchain. Likewise Hinman sees that “the purchase of a token looks a lot like a bet on the success of the enterprise and not the purchase of something used to exchange for goods or services on the network.”
“Some may be attracted to a blockchain-mediated crowdfunding process. Digital assets can represent an efficient way to reach a global audience where initial purchasers have a stake in the success of the network and become part of a network where their participation adds value beyond their investment contributions.” Hinman commented.
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Thinking along these lines of thought, start ups are tapping on the hype of cryptocurrencies to sell their dreams to the common folk rather than angel investors, venture capitalists and start up enthusiasts. Coin investors have limited knowledge about ICOs and failure to evaluate the potential value of a start-up could see one’s life’s savings flushed down the chute.
Under the Securities Act, the asymmetrical information between ICO founders and the investors should be rectified. The disseminated information should therefore help the investor make an informed investment decision. Misinformation due to the ICO’s part will be held liable, as compared to the current situation where investors are told to “invest at your own risk”. The regulation should offer safeguards and improve the risk assessment process.
This should help clarify the differences between coins and ICOs.