Last week, the SEC roiled crypto markets by announcing targeted subpoenas on Initial Coin Offerings (ICOs) that might be violating securities laws. The actions aren’t completely shocking since the SEC issued several comments in the past few months addressing the potential for fraud in the unregulated ICO marketplace.
After raising an unprecedented $3.8 billion in 2017, ICOs are off to an even more ambitious start in 2018. According to data compiled by CoinSchedule, ICOs raised $2.8 billion in the first two months of 2018.
A Financial Grey Area
In some ways, ICOs are comparable to the similarly named Initial Public Offering (IPO), but in reality, they are more akin to a crowdfunding campaign and a donation. Investors are not entitled to future profits, and most don’t have voting rights for future company decisions.
For many investors, the value is in the digital currencies that results from the token sale. While ICOs can be a useful fundraising method, some ICOs launched on little more than a promise and a wish.
All of this has created a lucrative grey area that the SEC would eventually have to address. These subpoenas seem more investigative than punitive as they are pursuing information about sale structure for the pre-sale portion of the ICO.
Experts Look to the Future
So far, the reactions have been relatively positive.
Mark Toohey, founder, and CEO of TBSx3, an Australia-based blockchain logistics and supply chain management company, notes,
“In the long-term this is a very positive move. We are building an industry and there is no place for dishonest or incompetent operators.”
Toohey’s comments are well supported. According to The Wall Street Journal,
“A soon-to-be-published Massachusetts Institute of Technology study on the ICO market estimates that $270 million to $317b million of the money raised by coin offerings has ‘likely gone to fraud or scams.”
There is little precedent for the ICO boom. At the start of 2017, the total crypto market cap was less than $20 billion. That number exploded to more than $850 billion just one year later. Many investors and developers endured a colossal fear of missing out and embarked into the uncharted and unregulated ICO market.
With little time to develop norms, expectations, or legal guidelines, experts and pundits sprang into action to advise the movement.
As Toohey observes,
“With the recent crypto-hysteria, I have been stunned to see the rapid emergence of overnight legal experts spruiking their wares at conferences and advising clients.”
The collective ignorance surrounding the ICO market made the SEC’s actions seem inevitable. Toohey predicts,
“The SEC may well find that some lawyers neither understood the technology nor the legal implications of the paths they advised clients to take (or that they did not strongly advise their clients not to take).”
At this point, there is little clarity about which companies received a subpoena, and how the SEC is following up on these injunctions. However, the subpoenas are different than more targeted and aggressive actions against companies like Arise Bank, which made dubious claims about being a federally insured bank.
Of course, what the SEC will actually find in these subpoenas is still unknown, and its merits will ultimately be judged on that information.