Are All ICOs Now Officially "Securities" According to the SEC?

in #cryptocurrency4 years ago (edited)

Just released:
SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities

A few parts jumped out at me:

Those participating in unregistered offerings also may be liable for violations of the securities laws.

So... if you bought an ICO token the government might come after you?!?

"The innovative technology behind these virtual transactions does not exempt securities offerings and trading platforms from the regulatory framework designed to protect investors and the integrity of the markets," said Stephanie Avakian, Co-Director of the SEC's Enforcement Division.

"...and trading platforms..."? What does that mean for exchanges facilitating the trade of ICO tokens or any cryptocurrency tokens which might be considered ownership in a distributed autonomous organization (such as STEEM)?

I know I'm biased against government, but "integrity of the markets" sounds to me like "things we can control."

In light of the facts and circumstances, the agency has decided not to bring charges in this instance, or make findings of violations in the Report, but rather to caution the industry and market participants: the federal securities laws apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology.

Essentially, "We're not going to arrest you now, but we're putting this out there so we can arrest you whenever we want."

Why can't they just get out of the way and let markets regulate themselves? I'm so frustrated by the "to protect you" attitude of government. The blockchain space is one of the most exciting and innovative areas of global technological development going on right now and they come along with a report like this to potentially screw it over.

I'm pretty angry about this. Yes, I feel for those who get scammed by shady ICOs or hackers, I really do. I feel more for those who are violated every single day by governments and their monopoly on the initiation of force in a geographic region. Peaceful people, going about their lives, are threatened with fines and being caged if they don't follow arbitrary rules to "keep us safe".

Does this mean the ICO party is over?

Is this why more and more ICOs do not allow U.S. citizens to participate?

As U.S. citizens buying and trading cryptocurrencies, are we now going to be buried under more red tape, government "regulations", and new threats of violence?

I'm not a lawyer, so I don't know the implications of this report, but I'm currently not happy about it.

What do you think?

You can read the full report here:
Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO

Related: What Is the Howey Test?

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I was just commenting on another blog post about this. One consequence which is also wrapped up in this ruling is how it will impact Section 1031 Like-Kind Propert Exchange claims reported for US Income Tax purposes.

Essentially by designating these tokens as securities or a financial instrument, it would trigger the exceptions clause in section 1031, which kills the ability to defer capital gains tax. Instead of remitting when you move into fiat, every transaction would have to be reported and tax paid in the year the tax event occurred.

Regarding the issue of those participating in ICOs, the intended target of that message is not the consumer. I think it's intended for the tech companies conducting fundraising via ICO which is bullshit. Blockchain tech is the future of tech. Prepare for a mass exodus of tech companies from the US. Way to kill an entire industry SEC. you could have rule it fell under the Crowdfunding exemption in the 2012 JOBS Act.

This is why we can't have nice things.

Ugh. I hadn't even considered the capital gains implications.

Bah. I'm going to poor myself a glass of wine.

The day that cryptos or exchanges are forced to produce statements to all of their clients, is the day they all go out of business. The billions of transactions that have already occurred will take a lifetime to report on. Egad.

@wakeupsheeps there is a case to be made they should have been providing information reports. Consider that the IRS already provided guidance that digital currencies would be taxed as property, so technically crypto to crypto exchanges such as Poloniex are facilitating barter transactions.

At a minimum they would have been required to provide Form 1099-Bs. TIGTA raked the IRS over the coals for lack of enforcement last September towards cryptocurrency tax evasion issues. The result was one month later, Coinbase got hit with a historic and sweeping "John Doe" summons, which they limited the scope of in an agreement with Coinbase. My guess would be Kraken and Poloniex are next on the enforcement radar.

I appreciate the info, saves me an investigation. It seemed rather odd that government hadn't already stepped into the crypto space. Many untaxed transactions have come and gone.

If I remember correctly, there were about <1,000 people who declared capital gains taxes taken out of coinbase last year. Policy changes afoot.

When the implication of this hit me, I went straight for the whisky. Now is not the time for training wheels.

@lukestokes I also just wrote about this and personally 100% agree with your last comment to @theguruasia unfortunatley it is the "few bad eggs" that have ruined it for the rest of us. We as a crypto community don't need a government body to "regulate" i.e get their hands on the tech so they can slow down the development why they make up some more bullshit to tax us with or apply more constraints, more unjust costs and more then likely a blanket ban because of a few hackers, fraudulent dicks and idiots that didn't read into the ICO start-up and just trusted their "trusty mate" who knows everything about that coin and he/she invested their life savings.. So frustrated

This looks a bit like a scare play... First of all, it's only talking about the DAO's tokens, not all 'ICOs':

Such offers and sales, conducted by organizations using distributed ledger or blockchain technology, have been referred to, among other things, as "Initial Coin Offerings" or "Token Sales." Whether a particular investment transaction involves the offer or sale of a security – regardless of the terminology or technology used – will depend on the facts and circumstances

That being said, many ICOs are structured in very centralized fashions with a clearly defined group of people behind them (probably a corporation, which means the SEC's rules apply), and if they carelessly make promises about what buying the token entitles one to, then they do indeed run awry of securities regulation.

This is part of the saga of the DAO, and it absolutely makes sense. Standard hegelian dialectic, and the corporate investors in the DAO (the banks) are infamous for using hegelian dialectic to manipulate and control. The precedent set here will absolutely apply to other tokens in the future, but I don't think it can be applied to, for example, bitcoins, which don't represent a promise or entitlement, and so cannot be considered a security.

The hypocrisy of the SEC knows no bounds. They sit on their hands while massive corruption and manipulation runs rampant and then issue a statement like this. They're simply pissed that some of the sheep jumped the fence. They want us all in the Stock Market so they can sheer us all at one time.

Sure feels that way.

It was only a matter of time before this happened. The popularity of ICO and the amount of money that was being raised attracted a lot attention, so here we are.

Given the difficulty in tracking and prosecution, this is likely hot air for the individual user. However, they could choose to mess with the centralized failure points, like the exchanges.

I may need to take account of this in my series on how people are over-calculating taxes on their Steem rewards. I hope I don't have to start making edits.

The whole thing is frustrating for me because I view cryptocurrency as an escape out from this regulatory hell for those who want to build, innovate, and thrive.

It may be hot air, or it may be an excuse to throw anyone in a cage who is working on practical solutions to make government more irrelevant.

Yeah, you said it. They're never going to simply "let" us have an escape from their regulations. At best, we'll have to argue it in court...and that's a real best-case scenario.

Fuck it. I am moving to Switzerland permanently after reading this.

Stuff like this makes me want to get out of dodge and renounce my citizenship.

Norway and Denmark are some of the most happiest countries they say. But I love some of the original American values and the idea of the American dream. We broke apart from England, yet it seems like we are becoming like England over time.

I think renouncing would be a bit extreme maybe. But I am surely worried about the future of this nation. America has great people, cool landmarks, etc just the leaders aren't leading. They all fight with each other and probably care more about their own agenda and wealth than the voters who sent them there. I thought Trump was going to be the big change we needed but he even disappoints me now. I guess I believed the hype and hot-air. I don't think I'm ever going to believe another politician again.

Back in the day thing communication was done by paper and horse. I would like to see a system where everyone can comment on laws, propose edits(sorta like a pull request on GitHub), even vote it directly instead of a representative having to do it. We have the internet now. Be nice to bring the law making process digital and let everyday Americans actually get involved in the process themselves instead of just sending letters, emails and phone calls. Instead of electing people to control the government, we control the government ourselves. Then however I worry trolls and stuff would abuse this but then like maybe more than 50% of Americans would have to vote or not on proposals so that would hopefully weed out trolls. But still would want some check and balances somehow for really controversial things.

Yeah Trump is doing what he said he would do but lousy Democrats are blocking him. Even worse some key Republicans are initially standing in his way. The whole system in the US is broken. Its not what our country was founded on. How can other countries be leading the way rather than the US? Our whole system was supposed to be the most free and capitalist nation in world. Most decentralized with our State system yet it seems more taxed and regulated than ever! Liberals have got to go!

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The SEC essentially said that we are all criminals and that they will hold it against you when they feel like it, for our safety. It's similar to the NSA recording every communication in this country. If they need to nail you, they can always go back and listen to their recordings of your phone calls and emails.

It's as if all that reside in US are on parole already, don't step out of line or we'll charge you with all these crimes that you didn't know that you committed. Pffff!

Geez. Thinking about being on parole in the country that already has the highest prison population... not a fun thought.

They've got plenty of empty big box retail space that can be repurposed. Not fun thoughts at all.

This is just sad, I may be a young'n in this world we call crypto so I do not know what it was like before, but I wish that i didn't have to grow up in a version of this world bombarded by the government constantly. California is infamous for too much govt intervention and it hurts us, I can only imagine the ramifications of this decision for crypto owners across the US in the future. Thank you as always for your analysis and deconstruction of the legalise @lukestokes!

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Wonder if they grasp what Ethereum devs did to correct that theft? By creating ETH they essentially doubled the amount of ETH by creating ETH and ETC. So whomever has stolen that 50 million got away with it because ETC is still traded on the open market. Now BItcoin Cash (BCC) wants to do the same for BTC even though both are trading now at different prices on the open market. They are not going to fork BTC on Aug. 1st because they already have with BCC, am I the only one that sees the fraud here? If you buy a digital apple from me and I replicate it before giving it to you have I given you anything that I do not have? No, I still have a digital apple, now you do too, but I also now got your money. Check out

While it may seem like you'd have less at first, you're really getting two apples, both of which (in ETH & ETC case) have a much greater total value seperately.

Many people held ETH through the split and kept the ETC they were given or sold it immediately. The total value of the two chains today is more than 10x what it was at the time of the split. ETC's market cap alone is worth more than the original ETH in 2016.

It's not bad news, if you hold BTC through the fork you will have both coins which you can sell or hold. Here's an article I wrote about how to profit from the split just yesterday:

Profit From The Bitcoin Cash Split

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I remember seeing I can't believe they raised $62,706!!! Wow. Humans are pretty stupid, I guess. Do we need the SEC for stuff like this? No, we need people to stop being stupid.

Forks of existing blockchains is something I'm still not a big fan of. The different examples I've seen just confusing things. It also makes me wonder if they are just attempts to get identities attached to old addresses since you have to put them in an active wallet and sign something to prove ownership. My BTC is in paper wallets, so I'd rather not bother with that.

The sole function of the SEC is to increase the wealth gap. I am a startup founder in the middle of raising money and the compliance required to raise money from non-accredited investors that believe in our mission outweighs the need for their relatively small amount of investment money. The SEC denies access to high growth startup stock as an asset class to people worth less than 1M or make less than 200k per year. In my opinion this is criminal. There are new financing vehicles such as equity crowdfunding for non accredited investors that open this up, but you are still playing by the rules of the SEC.


Yet we still have the Lotteries and Casinos... People lose lots of money on those!

I don't see why someone should have to have a million dollars to buy into something they think is cool. Don't risk more than you are willing to lose. No different than the lottery(oh wait, those help fund schools they say!) and Casinos.

I wonder if the exchanges will have to register with the SEC now to? Also wonder how that effects things like selling Bitcoins to friends or LocalBitcoins... Are you now a broker under the law?

One thing that really annoys me is all the bureaucracy. I wish things were written out in more plain English, straight to the point so the average honest entrepreneurial person could do things without spending millions of dollars on lawyers, paperwork, bonds and licenses, etc. Seems like starting a exchange is getting harder and harder. Plus the internet is global - so instead of complying with federal law - if you want to serve the entire US there's 50 different rules to follow - however some are very similar. Then going international is another mess.

For example some exchanges ban people from New York, which the main regulator who made that law is now consulting! We need to really get rid of that revolving door and funds out of politics!

Only those with wealth are allowed to make passive incomes, everyone else must sell their labor.

Translation: Slave Masters are allowed to own slaves. Slaves are not allowed to leave the plantation.

And they do it all in the name of "protecting" people.

Ugh. So frustrating. I get that we should care for those who can't care for themselves, but at some point... I dunno. It just seems like the "threats of violence" approach is such a terrible one. Maybe they see ICO space similar to predatory lenders giving out mortgages they know people can't pay back. That's a stretch though because speculative investing should only involve money people can afford to lose. If they get burned a time or two to learn that lesson, should that be okay? It's almost like government is still trying to be everyone's mommy and daddy. Let's all grow up instead.

you described it best: "integrity of the markets" sounds to me like "things we can control."

They don't want to protect the people. They want to protect themselves because they see how cryptocurrencies can actually fuck them up completely in the future.

the Commission has determined that DAO Tokens are securities under the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934

Nineteen? Thirty? Three? !!!

The SEC must have been absolutely visionary to have come up with laws that would govern technologies invented nearly a century later.

Check the expiration date on that law, SEC. It smells kinda funny.

So glad we're still living under rules made almost a century ago. FML.

Why can't they just get out of the way and let markets regulate themselves?

Because what they really want is control, and not of the market, of YOU

What's that emoji I'm looking for? Oh yes, this one 🖕

Haha. Yeah, that about sums it up.

"Those participating in unregistered offerings also may be liable for violations of the securities laws."

This doesn't sound good at all for those U.S. residents that bought into ICOs.

From the SEC report, its clear that the form The DAO took was a security, and not all ICOs would fall under this category.

I have written an article about the DAO Decision by the SEC that asks the reader to decide if the SEC made the correct decision right here on Steemit.

Be sure to check it out.

Great work @lukestokes and cheers to your continued community support.

I post regularly about Steemit, Bitcoin and other crypto related material, check out my Steemit page and follow and VOTE UP for the fastest active news you can run with! :D

Thank you,

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I think it's a hole in the wall your president promised. The hole will be crowded with legit and scam ico's.

It sounds like bumpy ride for ICO's.

This is why I never liked ICO's. When you create a system mirroring the existing system you end up falling into the crosshairs of New York. Remember, criminals always want their cut. The SEC is no different.

The government, to me, is mafia that outsmarted all the other criminals. They have a monopoly on the use of force, currency creation, and "justice."

It was just a matter of time. The ones who ban Americans from participating were doing a very smart thing.

Bringing the Hammer Down!

That hammer hitting my head is about what I feel at the moment.

I'm curious what exactly defines an ICO. Was there an ICO for STEEM?

Some claim it was a ninja mine, but I think it just followed this pattern to raise funds without being an ICO or a money transmitter:

Don't quote me on that though. :)

Good call, thanks!

The logistics will make it impossible. The nature of cryptocurrency makes it decentralized for this very reason. The only thing they'll do is punch themselves in the face or make ICO offerings more strong.

What they dont know cant hurt em' 😛

We already know the government "knows" just about everything. If they want to take someone down, they will, and rulings like this just give them more "justification" in the eyes of the public.

This is really nothing to be worried about. The SEC does not have the infrastructure to investigate cases in which a token may be considered a security or not. Nor is the legislation in place for them to prosecute offenders for issuing a "security" that might legitimately be considered to be something that is not a "security".

Securities fraud is a thing. If we don't start worrying about this, there will be so many laws on the books that each and every day they will have multiple excuses to throw anyone one of us in a cage. This is not okay.

Excellent, thank you for this information. I knew it was only a matter of time.

Thanks for keeping us informed.

Very difficult period. Many countries try to become monopolists of crypto-currencies. The Cold War

Damn government regulations... South America is looking pretty good these days! 😎🙌🏼

I also do not like it, however I also feel it just the SEC being...well, the SEC. There ICO space is already crowded, there are a lot of scams and projects that do not justify creating a token. They just do it because it is an easy way to raise money without having to bother to comply with any regulation or paperwork.

SEC has regulated all forms of fundraising in the US, including crowdfunding. They do it to protect the public (so they say).

Obviously all ICOs are now trying to be careful, by stating that they do not accept US investors (obviously the blockchain knows no borders).

Still it would be interesting to see how things evolve in the ICO space.

This "protect you" "thingy" may cause a (more of a negative, less positive) impact on the cryptocurrencies future.

Not sure what this really changes for US investors. Most ICOs required us to use a VPN anyway. But, it does hurt the space in terms of development in the US though. I have no idea how many of these ICOs are US based, but seems like not many?

Based on these (I haven't read the whole report yet)

The innovative technology behind these virtual transactions does not exempt securities offerings and trading platforms

the federal securities laws apply to those who offer and sell securities in the United States

ICOs with the right structure and a clear disclaimer like "this token does not confer any rights" are safe. I totally agree with you about regulations, in any case.

But don't they all have that language? Just by saying, "Oh, no, this isn't a security, it's a donation with no rights" doesn't make it so in the eyes of the law.

Yeah, that's true. They have to also be able to make a reasonable argument that they don't fit the legal definition of "security" or that they're exempt. Even then, regulators may see things differently or even contradict themselves. Sometimes I really want to leave this country...

Have you seen this one?

I'm confused by these projects that have a "pre ICO" before the real ICO. I just don't get it. It does seem like any interesting project though. I like the idea of cryptocurrency helping impoverished people.

It's just a pre-sale with a bonus. They also said they "needed to do the pre-ICO before legally forming because the nonprofit element brings in a whole other sector of law, and requires 50k-ish of lawyer bills."

I am not a lawyer and don't understand how RootProject can claim to be so well protected. Just asked in their slack. Hopefully they've got more than that statement on the website!

Few hours ago I did read this report and understood SEC is trying to control frauds which binds with ICO. I have no real gut to say this is wrong! Coz it needs to be controlled. Specially, it might be used by scammers, hackers and etc to do nasty things.
I personally have some bad experiences with ITO (Initial Token Offering). Anyway, this report bounce between goods and bads. After all it's not very easy to control, but with a control it might be secure investment to ICO investors too.


What bothers me is the assumption that "regulation" automatically means government. To me, the best and most effective form of regulation is done via distributed means with individual actors working in their own self interests, building trust with their customers and service providers. Chaotic systems can not be and should not be controlled, IMO. The best way to prevent "nasty things" is for people to do their due diligence and work with trusted individuals and organizations. We can't expect government to keep up with this technology and somehow protect us from our own stupid mistakes. It's our responsibility to do the research and understand what's going on. If that's too complicated, then we should turn to advisors who the market will pay for their expertise and trusted counsel. The battle between hackers, fraudsters, and those who want to justly innovate and participate will never be over, but it requires individual involvement. We have to rise up to meet the challenges of this new technology, get educated and make informed decisions. The longer we rely on centralized, bureaucratic solutions to our own problems, the longer we'll have to deal with government corruption, theft, and fraud on a massive scale.

Compared to what governments and central bankers do every single day to steal wealth from individuals through the manipulation of currency for the benefit of their cronies, the worst ICO scammers are saints.

Honestly, if this means less ICO's then I'm for it. ICO's are not healthy for the cryptoeconomy.

That's my gubmint for ya - pretending to protect me from myself when in reality just wanting more power for itself.

The money in ICOs are sizzling it was sniffed by the SECs hound-like noses. Surely these news will scare away US based cryptotech companies but maybe they will find something to circumvent SECs unjust rulings because they don't protect the people, its the state they protect.

So informing and deserve my Upvote and follow.
Though i am aiming high too, i would appreciate a lift up from any body i.e the Big Wales in the trend.

Hi thank you for your amazing kind gift, I really appreciate it, I will pay you back asap, your such kind person I can't thank you enough :)

Gifts don't need to be repaid. If they did, they'd be called loans. :)

You're welcome, and it gave me joy to help someone who deserves support from the community. No need to steal my joy be feeling bad or obligated to repay. Your gift to me is your gracious thank you. If the situation was reversed, I'd hope to have the strength to ask for help and accept it as you have done. Enjoy the love shown to you by people who care.

I am overwhelmed by the love and caring, I have never felt this in my whiole 53 years. I cant Thank everyone enough. I can see a light at the end of the tunnel, thank you so much :)

@lukestokes - It has been an age old custom of people in the position of power to use any small incident (a scam or even a teething trouble type of issue) as an excuse to put in 'Controls'. An example that I have seen is that, in South Africa, millions of dollars were spent on an 'automated toll system' because there was a protest about road infrastructure. Now, effectively, the people are paying toll for some roads which were already there and widening them fell under normal expansion and city planning duties. Typically authorities like controls because it gives them 'power'. Most of the perception about power in the world today is how much 'negative' power is wielded rather than 'positive or creative' power. I am sure that the crypto world will digest the initial setbacks of ICO scams and move on, with safeguards in place. It does not really warranty harsh measures and step in from authorities in my view.
Thanks for this update. Upvoted.

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Good read. Looking forward.

I think the reasons are growing for renouncing my US citizenship once I have an Aussie passport. The compliance burden of earning money, holding foreign bank accounts and operating a trust overseas as a US citizen is ridiculously excessive. They demand under threat of violence to know every detail of your financial situation in order to enforce their draconian laws.

So yeah, I feel pretty much like you do.

Thankfully, so far, as I understand it, Australia has determined that crypto, in general, is a capital gain asset and that the tax event occurs when converting back to fiat. But the more crypto is used as money and accepted as payment, this will likely change.

oh no :/
it really seems that you are having a hard time over there in America :/
hope this will get better soon ;)

don't know what they want to achieve making their own game with own rules.

Seems like crypto currencies should be labeled as property instead of a "coin". Then, you can't be an investor. You just own property. The coin offering concept seems to be confused with offering shares of a company, which is the link the SEC is trying to make. Coins are not shares of the company. At least it does not appear to be. Instead, the people creating the coin should make it clear it is an intellectual property product line. This is clearly a perception battle.

Government just want a piece of the action, or, a slice of the pie. They want control of everything we own and possess which is ridiculous.