The FISMA Focus IPD

Amid the general deregulatory thrust of the Trump Administration, the Securities and Exchange Commission has launched a major regulatory initiative directed at initial coin offerings (ICOs), the fundraising devices that provide a digital “coin” or “token” to investors. SEC head Jay Clayton recently stated that he had instructed the SEC staff “to be on high alert” for ICOs that violated the federal securities laws. The SEC recently obtained a court order halting an ICO that claimed to have raised $600 million, alleging that it relied on false and misleading statements concerning its business operations. State and industry self-regulators have also signaled a crackdown on ICOs and cryptocurrencies. The regulatory effort enfolds two themes: ICOs must comply with the federal securities registration requirements and many ICOs are no more than old-fashioned frauds. Further, the form of a transaction cannot eclipse the economic substance and the manner in which an ICO is marketed is significant in determining whether it is a securities offering.

The regulatory fusillade arrives as ICOs have become big business. According to the website Coinschedule, there were over 230 ICOs in 2017 that raised approximately $3.7 billion. The commencement of Bitcoin futures trading likely will make cryptocurrencies a more attractive investment product. The surge in ICOs also occurred as the value of Bitcoin, the most prominent cryptocurrency, rocketed only to recently plummet, furthering the demand for additional safeguards in the burgeoning industry.