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Of the US SEC, ICOs and Ground Rules, Expect the Token Market to Flourish

February 12, 2019

China may be fond of blockchain but is against cryptocurrencies, exchanges, and tokens. They banned them in September 30, 2017. As such, comments from officials representing the world’s first and third economies including South Korea are often shaping and affect prices of tokens. At the back of what has been termed as a resurgence, a rejuvenation is US SEC’s Hester Peirce comments made during the Protecting the Public While Fostering Innovation and Entrepreneurship: First Principles for Optimal Regulation at the University of Missouri School of Law. It is of her opinion that the tokens sold to finance and expand a functional platform should be classified as utilities and not subject to the US SEC securities law. Here’s an extract from her speech:

“A group of people get together to build something and they need to find investors to fund their efforts so they sell securities, sometimes called tokens. The SEC applies existing securities laws to these securities offerings, which means that they must be conducted in accordance with the securities laws or under an exemption. When the tokens are not being sold as investment contracts, however, they are not securities at all. Tokens sold for use in a functioning network, rather than as investment contracts, fall outside the definition of securities.”

While we understand that her remarks don’t represent the stance of the US SEC whose chair Jay Clayton is very apprehensive of approving a Bitcoin ETF citing manipulation and lack of tools to effectively monitor and mark out rogue players, it is increasingly becoming clear that regulator tasked with leveling the field, promoting innovation and protecting the filed might—and would—approve a Bitcoin ETF and except some tokens from securities law. Remember, William Hinman, head of the Division of Corporation Finance at the SEC during the Yahoo All Markets Summit held in San Francisco in Q2 2018 said this about ICOs and how classification based the Howey Test apply is reached:

“Central to determining whether a security is being sold is how it is being sold and the reasonable expectations of purchasers. The impetus of the Securities Act is to remove the information asymmetry between promoters and investors. We stand prepared to provide more formal interpretive or no-action guidance about the proper characterization of a digital asset in a proposed use.”

William’s interest in ICOs and cryptocurrencies didn’t stop there. In Nov 2018, during the D.C. Fintech Week conference, the SEC Director said the commission had plans to publish a guide that will help clarify whether a token or a cryptocurrency would be classified as a security as a token. Because a digital asset is nothing more than code, the publication would be a reference for developers planning to crowdfund:

“We also will be putting out more guidance, the idea is a plain English instrument that people can look at and they’ll bring together sort of my Howey-meets-Gary speech and that analysis … We’ll elaborate on that in a very plain English way, so ‘do I think I have a security offering,’ look at that guidance and you should be able to sort things out.”

Combined, it is easy to see why comments from Hester and William is bullish for cryptocurrencies and ICO tokens in particular. While Hester’s opinions are her own, those of William represents the position of the SEC. Moving on, token issuers now know the legal, defined funding route to take. First, they must establish a working platform and thereafter, assuming they go the ICO route, must ensure there is complete decentralization with no point of control while marketing their tokens in a way that the purchaser expects no gain from the asset so as to meet the stipulations of the Howey Test. Before, developers were unwilling to roll out products and conduct ICOs lest they brush the SEC the wrong way. With the SEC known for making examples out of rogue developers and traders, no one risked going to jail even though there were no specific rules guiding these developers. As a result, projects crumbled and investors tightened their purse strings starving out legit, utility-issuing projects. The whole point here is, there are RULES. Every token issuer must adhere to what the SEC lays out if they want their tokens to be classified as utilities unrestricting investments from all and Sundry.

The story is sponsored by newconomy.

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