Cryptocurrency ICO SEC Subpoena Lawyers
CoinDesk, which is a platform that provides news about the latest developments in the crypto asset and blockchain community, reported that monthly investments in ICOs was on the rise in the past year. As a result, the industry accumulated an estimated $3 billion in investments during January and February of 2018.
While the SEC has reacted to this drastic increase by creating a skilled cyber unit within the law enforcement division, it is still a complex issue because ICO structures are always changing. These changes may or may not provide implications on federal security laws, so there isn’t a regulatory scheme that is customized to ICOs. As a result, the SEC continues to struggle with the issue of whether or not crypto-currency is subject to jurisdiction by the SEC.
What is the Howey Test?
Crypto-currency doesn’t fit perfectly within the tradition categories that constitute securities as stated in Section 2(a)(1) of the Securities Act of 1933. This is also know as the Act, and it enables corporate stocks and bonds to be subjected to the Howey, which will decide if any certain token offerings would count as a type of “catch all” security. This can also be described as an investment contract. When the Howey Test is administered, the same formula will be used that was initially created in 1964 by the Supreme Court. This is an agreement that counts as an investment contract, and it involves an investment of funds in a common enterprise. In addition, there must be an expectation of profit, and the profits must be derived from the efforts of others.
The 2017 DAO Report did not specify any concrete guidelines in regards to developing a token offering test in addition to the Howey Test. In fact, it was noted that in February of 2018, the chairman for the SEC stated that he feels every ICO token reviewed by the SEC could be considered a security in legal terms.
What is the Utility Token Argument?
There are a many companies that continue to advocate that their ICOs are non-security utility tokens, so they should be outside of the SEC’s jurisdiction. In other words, an ICO is a fund raising structure that allows startup businesses to issue and sell crypto-currency to individual on an open ledger, which is often known as blockchains. This is an exchange for cash that is supposed to be invested in the development of a startup business and are typically network-based computing services.
When a given ICO includes tokens that are made to provide functional access to the products or services the business offers, many feel that these tokens are more like a pre-purchase investment or a coupon that is used to redeem a product as opposed to an investment in securities.
It is important to note that when an ICO token is considered pre-functional, which is when it is used before a business has started to develop the product, the SEC will issue subpoenas to send a clear message that these arguments gain little recognition from the agency. The primary focus of an SEC investigation is to observe board members and executives who use utility tokens, and the agency focuses on investigating promoters who have made offers before registering as a broker dealer.
Regulation D Exempt ICOs & SAFTs: What You Should Know
To comply with the ACT and the regulated SEC guidelines, an increasing number of businesses (especially startups) have made drastic efforts to establish ICOs to adhere to all the rules of the Act and the SEC guidelines. The first company to register a token sale was The Praetorian Group. The company did so by filing a Form S-1 with the SEC. The company has significantly relied on the registration exemption that can be found in Rule 506 C of Regulation D in the Act. According to this rule, an issuer of tokens is permitted to raise an unlimited amount of funds from unregistered product sales. However, it is necessary that all of the investors are considered accredited investors. In addition, any securities that are sold under Rule 506 C have restrictions, and if violated, can result in a lock-up period of token resales that can last up to one year.
The SEC attempts to stay ahead of the ongoing challenges to stay that come with the technology and market appeal of crypto-token offerings. Some feel that the use of the Howey Test is an antiquated method that is not able to properly address the unprecedented methods of capital investments and gains in today’s market society. However, the recent rise of subpoenas issued that was issued by the SEC is a warning sign that the organization is aware that many individuals are operating close to the fray of federal laws. An attorney can advise startup business owners (who want to use crypto-tokens) on the best course of action.