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

in #cryptocurrency7 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 Uetoken.com

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 uetoken.com... 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.

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