On February 28, 2018, The Wall Street Journal reported that the SEC decided to cap off the month the way the top U.S. financial regulator started it: targeting ICOs. On Wednesday, the Journal report stated that “scores” of subpoenas and information requests were sent out demanding details about the structure of sales and pre-sales of ICOs. While the article specifically mentions that the SEC has declined to comment and cites nebulous anonymous sources, the probes reportedly sought the subpoenas and requests from tech companies and advisers involved in the digital tokens market.
The SEC has been outright proclaiming its stance on ICOs as unregistered securities for a while now. In July 2017, a report came out concluding an investigation on DAO tokens, labeling the digital assets as securities. The U.S. regulator has hinted, not so subtly, at taking more action against ICOs generally. Prior to this year, however, actions taken against ICOs, like the shuttering of the Munchee’s ICO or the halting of AriseBank, have usually been linked to the idea that these ICOs were scams meant to defraud investors.
The tenor of the SEC’s stance on the broader ICO market appears to have changed, from hinting that the regulator views ICOs as unregistered securities in violation of U.S. Securities laws to outright warning ICOs of an oncoming crackdown in written and oral testimony. That testimony was delivered by SEC Chair Jay Clayton on February 6, 2018, before a Senate Committee hearing. During his testimony, the Chair noted, “From what I have seen, initial coin offerings are securities offerings. They are interesting companies, much like stocks and bonds, under a new label. You can call it a coin, but if it functions as a security, it is a security.”
Also of particular note to the ICO industry was an exchange during the same hearing that the SEC Chair had with Senator Elizabeth Warren, where Clayton noted that no ICOs had been registered as securities with the SEC prior to the hearing and no planned ICOs had sought registration as securities.
Some ICOs, such as Overstock’s tZERO, have purportedly planned to file a private placement memorandum (PPM) with the SEC. PPMs allow for direct sales of securities to investors and are usually marketed to accredited investors. Overstock announced its release of a restated version of the PPM, initially dated December 18, 2017, in an 8K filing this morning.
According to the document, “In February 2018, the Division of Enforcement of the SEC informed [tZERO] that it is conducting an investigation in the matter Re: Overstock.com, Inc. (NY-9777) and requested that the Company voluntarily provide certain documents related to the [PPM] and the Tokens in connection with its investigation. The Company is in the process of responding to this document request and will cooperate with the SEC in connection with its investigation.”
The PPM further states, “While the SEC is trying to determine whether there have been any violations of the federal securities laws, the investigation does not mean that the SEC has concluded that anyone has violated the law.”
The PPM also cites that both of the broker-dealer subsidiaries (Pro Securities and SpeedRoute) connected to the ICO are being investigated by regulators. Pro Securities was notified on February 22, 2018, that the SEC is conducting an examination on their practices and the Financial Industry Regulatory Authority (FINRA) has issued several document requests with SpeedRoute, dating back to December 2017.
While some in the industry may argue this is more FUD (Fear, Uncertainty, Doubt) speculation from the media, the SEC appears to be making good on its prior warnings. And Overstock’s disclosures in its filing with the SEC show at least one case where the warnings are being acted upon.
Editorial Note: An earlier version of this story included Overstock’s tZERO among the ICOs that had received subpoenas. In fact, there was a request for information, not a subpoena.
Andrew M. Nelson is a researcher and analyst of alternative investments. While in law school, he was drawn to cryptocurrencies by the potential impact of smart contracts on international trade. After years of analyzing alternative investment funds, he uses his JD and MBA to analyze regulatory and investment trends on new, alternative, and illiquid asset classes. You can follow Andrew on Twitter @Andrew_M_Nelson