“Wolf of Wall Street on steroids” is how one former SEC commissioner described the overheated ICO market, which has raised more than $1.6 billion this year so far, and over $6 billion last year. The SEC is now turning up the heat on the unregulated token-selling juggernaut with broad subpoenas and requests for information covering every minute detail of the structure of token sales and ICO pre-sales.
Should Have Seen It Coming
Investors who watched the Senate hearing on banking last month should have seen it coming when SEC Chairman Jay Clayton said:
“Those who engage in semantic gymnastics or elaborate structuring exercises in an effort to avoid having a coin be a security are squarely within the crosshairs of our enforcement division.”
Focus On ICO Mechanics
According to The Wall Street Journal the SEC probe is not focused on cryptocurrency trading in general but rather the detailed mechanics of ICO fundraising. Drawing particular interest from regulators are those projects in which investors have purchased tokens but there is no utility value because the proposed blockchain has not yet been built.
Long On Hyperbole, Short On Details
One MIT study reported that ICO whitepapers are becoming longer on promises and hyperbole, with diminishing clarity about how those promises will be realized. This particular charge has been leveled against the multi-billion dollar Telegram Open Network ICO, by far the richest in history.
Another element of token sales under the SECs microscope is the SAFT (simple agreement for future tokens) which has been used to skirt securities regulations. The agreement is designed for developers to raise funds to build a functional network that give the tokens a specific application or “utility” directly tied to that network’s ecosystem.
Speculation Begins On Day One
The problem arises when investors begin to speculate on the value of the token itself, which we all know happens on day one. That’s when it starts looking more like a security to regulators. This is exactly what happened when Telegram ICO investors began flipping their tokens for millions of dollars on the secondary market before the token sale had even begun.
Not Blind To Shenanigans
SEC’s Clayton showed that he’s not blind to these shenanigans with these chilling words in the Senate hearing last month: “I believe every token I’ve seen is a security.”
Cryptocurrency markets seem to have taken the news of the SEC probe in stride, taking a hit of about 6% after the news broke, but recovering nearly all of that loss in today’s trading. Bitcoin is trading just under $11,000. It seems that, for now at least, the SEC is focused on ICO compliance with securities laws and is leaving crypto trading alone.
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