The United States Securities and Exchange Commission (SEC) is vehemently opposed to a common crowdfunding practice in the cryptocurrency industry called the initial coin offering (ICO). An ICO is similar to an initial public offering where a company or corporation raises investment capital by offering its stock to the public for the first time. Only in an ICO, a digital currency or token is distributed instead of a stock, and the token can have a variety of uses that blur the line of what defines a traditional security.

Still, the SEC believes that the way ICOs are funded has them falling under security laws, and the companies interested in launching an initial coin offering need to comply with SEC private placement rules and investor protection guidelines. Those that fail to comply, may be subject to cease and desist letters in the future, as has happened with a number of US-based ICOs.

To further warn potential investors of the dangers initial coin offerings, the SEC has published a website on the increasingly popular capital raising method, providing what the SEC calls the “three ‘Rs’ of ICOs: Risks Rewards and Responsibilities.”

The website reads:

“Companies and individuals are increasingly considering initial coin offerings (ICOs) as a way to raise capital or participate in investment opportunities. While these digital assets and the technology behind them may present a new and efficient means for carrying out financial transactions, they also bring increased risk of fraud and manipulation because the markets for these assets are less regulated than traditional capital markets.’

The list of potential risks, rewards, and responsibilities is directed both at investors and potential ICO issuers and cover off on how initial coin offerings could be securities, may need to be registered with the SEC, or may pose “substantial risks.” To avoid those risks, the SEC warns investors to do their own research, ask questions, to understand the product, and to take extreme caution if and when an investment sounds “too good to be true.”

The SEC also takes the opportunity to warn would-be ICO issuers, asking them to “use caution before promoting offers and selling coins.”

A month ago, the SEC launched a fake ICO website called HoweyCoins.com to provide a working example of what a fraudulent ICO may look like. Investors who clicked on any of the fake site’s ‘buy now’ buttons, were redirected to educational materials on what red flags to look out for when considering investing in an ICO.

[Image Credit: WikiMedia Commons]

In a bid to raise awareness of potential investment scams in the cryptocurrency space, the U.S. Securities and Exchange Commission’s (SEC) Office of Investor Education and Advocacy have launched a fake website posing as a luxury travel firm kicking off the pre-sale portion of their initial coin offering (ICO).

The website HoweyCoins.com, is a tongue-in-cheek play on everything your run-of-the-mill bogus ICO offers. From ‘too-good-to-be-true’ promises, to flashy images of champagne bottles and palm trees, to convoluted and often-plagiarized whitepapers, to pre-sale bonus countdown clocks, the SEC’s spoof site has got all of the common enticements found on fraudulent sites.

In a press release titled “The SEC Has an Opportunity you Wont Want to Miss: Act Now!” SEC Chairman Jay Clayton explained the motivation behind HoweyCoins:

“The rapid growth of the ‘ICO’ market, and its widespread promotion as a new investment opportunity, has provided fertile ground for bad actors to take advantage of our Main Street investors,” with Clayton adding:

“We embrace new technologies, but we also want investors to see what fraud looks like, so we built this educational site with many of the classic warning signs of fraud. Distributed ledger technology can add efficiency to the capital raising process, but promoters and issuers need to make sure they follow the securities laws. I encourage investors to do their diligence and ask questions.”

Anyone who clicks on the “Buy Coins Now!” Button will be redirected to educational materials from the SEC warning users of potentials scams and what red flags to look out for. Some of the red flags outlined include celebrity endorsements, claims of guaranteed returns, claims of SEC-compliance, and more.

Even the site name HoweyCoins is an Easter egg referencing the “Howey test” – a test created by the Supreme Court stemming from the SEC v. W.J. Howey Co. case in 1946, aimed at determining whether a financial transaction qualifies as an “investment contract.”

Who knew the SEC was this funny? Still, fraudulent investments are no laughing matter, and the SEC has done a solid job at raising awareness of the potential pitfalls of cryptocurrency investing, all while serving as an entertaining break from the daily grind.

For educational information on how investors can protect themselves, visit investor.gov or use the Buy Coins Now button on HoweyCoins.com.

ethereum

US regulators are cracking down on non-compliant securities issuers, and senior officials are set to meet to discuss whether that group includes the founders of Ethereum.

According to the Wall Street Journal, senior officials from the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) will meet on May 7 to hammer out whether certain cryptocurrencies — an ensemble that anonymous sources say excludes bitcoin — should be classified as securities under US law.

However, that group does include ether, whose creators are not anonymous and which was initially sold through a presale in 2014. That presale raised $18.3 million in bitcoin from contributors, who received an initial distribution of ether tokens when the network’s Genesis block was mined the next year.

The officials will reportedly consider whether ether, whose circulating market cap is $68 billion, is sufficiently directed toward its stated use case — running Ethereum DApps — or if token holders buy it primarily for its perceived investment potential.

They will also discuss whether the project’s creators retain a level of influence over the asset’s price that is comparable to the influence that traditional company executives have over a firm’s share price.

On Wednesday, Ethereum co-founder Joseph Lubin hit back at the report, arguing during an interview with financial publication TheStreet that the project engaged in copious legal due diligence when structuring its token sale and that he is “extremely comfortable” that regulators will not classify it as a security.

However, former CFTC Chairman Gary Gensler said recently that he would classify ethereum and XRP — the third-largest cryptocurrency — as “noncompliant securities,” though he acknowledged that ethereum’s present level of decentralization may earn it a favorable regulatory ruling.

The ethereum price initially fell in response to the news that regulators are examining whether the asset is a security, though it made a moderate recovery on Wednesday and was trading at $687 at the time of writing.

Featured Image from Pixabay

bitcoin

The top securities regulator in the United States says that bitcoin is not a security under federal law.

Speaking on Thursday in a hearing before a House Appropriations subcommittee, Securities and Exchange Committee (SEC) Chairman Jay Clayton told lawmakers that cryptocurrencies which function exclusively as mediums of exchange are not securities, unlike initial coin offering (ICO) tokens, which are.

He said:

“It’s a complicated area. Because, as you said, there are different types of cryptoassets. Let me try and divide them into two areas. A pure medium of exchange, the one that’s most often cited, is Bitcoin. As a replacement for currency, that has been determined by most people to not be a security.”

“Then there are tokens, which are used to finance projects. I’ve been on the record saying there are very few, there’s none that I’ve seen, tokens that aren’t securities,” Clayton added. “To the extent something is a security, we should regulate it as a security, and our securities regulations are disclosure-based, and people should follow those and provide the information that we require.”

Clayton’s comments are consistent with statements that he has made in the past regarding the difference between “pure” cryptocurrencies like bitcoin and tokens, which the SEC says fall under US securities regulations.

Recently, a group of Silicon Valley heavyweights met with the SEC to attempt to convince them to provide safe harbor to most ICO tokens — as well as ethereum — but the agency is said to have not been overly receptive to the proposal.

That ethereum was on the agenda turned many heads, as it is the second-largest cryptocurrency and has been assumed by many ordinary users to be exempt from securities regulations.

However, as many newer users may not realize, the ethereum’s initial development was funded through a presale in 2014, though new units of ether have been distributed through mining since the network officially launched and will eventually be issued through a Proof-of-Stake (PoS) consensus algorithm.

For this reason, former markets regulator Gary Gensler argued earlier this week that ethereum is likely a “noncompliant security.”

However, Gensler — who chaired the Commodity Futures Trading Commission (SEC) during the Obama administration and now lectures on blockchain technology at MIT — said that ethereum was perhaps more likely than XRP to receive safe harbor from regulators, since ETH distribution has become decentralized over the previous three years while XRP issuance is controlled solely by a single entity: San Francisco-based company Ripple.

Featured Image from Pixabay

sec

The US Securities and Exchange Commission (SEC) has thrown cold water on exchange-traded fund (ETF) providers jockeying to list the first bitcoin ETF.

Thought to be a game-changer for cryptocurrency adoption, bitcoin ETFs would provide investors with the ability to obtain exposure to the flagship cryptocurrency through a conventionally-wrapped investment product.

Fund providers have sought SEC approval for cryptocurrency-derived ETFs for years, but the SEC has been reluctant to lend its approval to these products, which would likely be popular among retail investors.

The rush to list a bitcoin ETF intensified following the launch of the first bitcoin futures contracts, as the general consensus among analysts was that the SEC would quickly approve a fund that invested exclusively in futures contracts, which currently trade on two regulated US exchanges.

However, several recent developments indicate that this may not be the case.

Most recently, the SEC sent two investment industry trade groups a lengthy letter outlining a number of “significant investor protection issues” that fund sponsors must answer before the agency will consider approving a bitcoin ETF.

“We believe…that there are a number of significant investor protection issues that need to be examined before sponsors begin offering these funds to retail investors,” Dalia Blass, director of investment management at the SEC, wrote in the letter, which was dated Jan. 18.

Blass said that the SEC was chiefly concerned about the liquidity of the futures markets, as well as how to assign a fair market value to what would be intensely-volatile products. However, she also touched on a variety of other topics, including market manipulation, custodial issues, and arbitrage.

“[T]he innovative nature of cryptocurrencies and related products, as well as their expected use and utility in our financial markets, means that they are, in many ways, unlike the types of investments that registered funds currently hold in substantial amounts. In light of these considerations, we have, at this time, significant outstanding questions concerning how funds holding substantial amounts of cryptocurrencies and related products would satisfy” federal securities laws, Blass said.

Earlier this month, the SEC reportedly asked fund providers to voluntarily withdraw their bitcoin ETF applications, citing some of the concerns outlined in the letter above.

Notably, the agency also pressured the first blockchain-focused funds to remove the word “blockchain” from their names, although these ETFs — which primarily invest in companies experimenting with blockchain technology — were allowed to begin trading this week after complying with this request.

Featured Image from SEC/Flickr