The Securities Exchange Commission is continuing to issue more statements and warnings on their stance on ICO’s.
The latest remarks were presented in a speech by SEC Chairman Jay Clayton in regards to the lack of transparency and potential for malicious activity in the market.
His concerns on manipulation in the token sales revolved around the fact that when tokens can be distributed freely for a startups and open source projects this causes an in issue where many can take advantage causing a market similar to penny stocks. This is not the light that these ICO’s would want to be seen in as penny stocks are rife with pump and dump schemes and can generally erode wealth.
He states “There is also a distinct lack of information about many online platforms that list and trade virtual coins or tokens offered and sold in Initial Coin Offerings, or ICOs. Through these platforms, individual investors can buy and sell tokens in the secondary market using virtual or fiat currencies. But investors often do not appreciate that ICO insiders and management have access to immediate liquidity, as do larger investors, who may purchase tokens at favorable prices. Trading of tokens on these platforms is susceptible to price manipulation and other fraudulent trading practices.”
He went on to state “The Commission recently warned that instruments, such as “tokens,” offered and sold in ICOs may be securities, and those who offer and sell securities in the United States must comply with the federal securities laws.
He then went on talk about how those who are involved in cryptocurrency exchanges would need to register a national securities exchange or obtain an exemption, stating that “any person or entity engaging in the activities of an exchange must register as a national securities exchange or operate pursuant to an exemption from such registration.In addition to requiring platforms that are engaging in the activities of an exchange to either register as national securities exchanges or seek an exemption from registration, the Commission will continue to seek clarity for investors on how tokens are listed on these exchanges and the standards for listing; how tokens are valued; and what protections are in place for market integrity and investor protection.”
An important note to make is “the Commission will continue to seek clarity for investors on how tokens are listed on these exchanges and the standards for listing; how tokens are valued; and what protections are in place for market integrity and investor protection.” This is a key statement which brings to the surface, questions like, how long will this process take, when will they make a decision and clarify exactly what they classify as securities when it comes to tokens, what are the nature of the protections that they are seeking to put in place? This will matter a great deal for how upcoming ICO’s are processed and listed.
He’s also aware of some who feel that there will be no repercussions of skirting the law and will not stand for this “Clearly, there are fraudsters in our marketplace who are seemingly unafraid of, or undeterred by, the risk of being caught. The SEC can target the underlying conduct of those fraudsters – and we do – but we also can and should arm investors with information that makes it more difficult for them to be defrauded.We think this will be particularly valuable when bad actors have shifted from the registered space for investment advisers and broker-dealers to the unregistered space.”
One of his major focus points would then, be on prevention of fraud, which would imply the need for more regulation upfront, the need for a mechanism for more information and understanding of what exactly and investor is opting into prior to investing. This would mean that many potential ICO’s catering to US investors may have to file paperwork with the SEC, impeding the quick rise of ICO’s. This would also mean more centralisation in a market that at it’s core is supposed to be decentralised.
In light of this news, it seems that the previously reported Overstock and tZERO ICO might be on the right track in going through a regulatory framework and building their distributed ledger platform for capital markets. In being the first SEC and FINRA compliant ATS to transform the initial coin offering market, they just might be one step ahead of the curve.