The power of the United States Securities and Exchange Commission in seeking initial coin offerings, or ICOs, has become a major boogeyman within the crypto community.

Most recently, the case against Telegram ended with that company leaving its planned open network and Gram tokens, which raised $ 1.7 billion. The question for the crypto community now is: Have we witnessed & # 39; death of & # 39; an ICO?

The answer is yes, in that, with all the fear of predictions, we will never see the likes of & # 39; the 2017 ICO boom. That vision of an ICO is indeed dead.

This is not the end for new tokens. But, until laws change completely, the massive capital increase seems to lead to a sign that freely acts as a thing of the past.

Bird Record of SEC Registration

The SEC came from two landmark laws that were & # 39; at the height of & # 39; e became Great Depression. The commission has substantial power over the sale of securities – a broad category of investors who generally do not hold both interest in an entity as debt to it. They are distinct from commodities, which will be described later. One of & # 39; most important powers of & # 39; The SEC is seemingly simple: Anyone offering securities to the American public must register that offer with the SEC.

SEC filing requires that a company disclose much of its financial information, such as decisive power to the public. Unfortunately, many companies do not want that. Not so long ago, the assumption was that SEC registration had nothing to do with crypto. That has changed in the past three years.

Since cryptocurrencies do not fall more clearly into & # 39; the rest of & # 39; e potential definitions of securities, their classification depends on & # 39; the much-disputed term "investment contracts." What exactly constitutes an investment contract is determined by the Howey Test, a critical result of & # 39; s statement in SEC v. W.J. Howey Co. (1946) that remains the basis of & # 39; definition of security today:

"For purposes of the & # 39; Securities Act, an investment contract (undefined by the Act) means a contract, transaction or scheme whereby a person invests his money in a joint venture and is run to expect profits only from the & # 39; efforts of a promoter or a third party. "

The point is that investment contracts require an investor to transfer their money to another entity and, depending on the work of that entity, to see profits. Commodities, on the other hand, derive their value from & # 39; a brand. Different laws govern their trade.

The assumption is that there is no entity that has an overwhelming control over a commodity such as oil, so there is no way to register a responsible entity. However, Royal Dutch Shell must register with the SEC to sell shares in US, meaning that critical information about its trades is publicly available to anyone, even non-investors.

The guiding principle is that if a company is going to raise money from public trading, they should be more transparent than you can reasonably expect with smaller businesses. In exchange for that transparency, publicly traded companies have access to much more capital. Understandably, the SEC's interest in crypto has expanded along with the bottom lines generated by the ICO's.

Brief history of & # 39; role of & # 39; e SEC in crypto: early years

In the early years of the Bitcoin network, the SEC was slow to get involved. It was an arcane region of the internet that remained a novelty. The SEC largely considered it as no threat to investors or did not know what to do with it.

The first Bitcoin-linked prosecution of the SEC was in 2013. The commission accused Trendon Shavers of implementing a ponzi scheme that promised incredible returns based on a unique BTC investment strategy that did not exist. At the same time, the regulator gave a general warning to investors against such virtual currency schemes.

Fraud that they are, Ponzi schemes fall to the SEC to prosecute, in order to keep them from making false promises of third-party work. Shavers & # 39; schedule was not so new. The point of & # 39; controversy in & # 39; e Shavers case was whether receiving an investment in Bitcoin could even be considered "money" per the Howey Test. The court found that it could, set a critical president.

A new era of SEC audit following the DAO report

However, the issue of ICO & # 39; s remained unresolved for years. The 2016 meltdown of DAO during its ICO, in which users ETH invested in exchange for DAO tokens, changed things. The event, which also birthed the hard fork of Ethereum Classic, also forced the SEC to issue the July 25, 2017 DAO report. This report confirmed the report that the SEC will not pursue, the company largely responsible to the DAO. But crucially, it also determined that the DAO was indeed an unregistered security offer and next time the SEC would not be so merciful.

"Anyone who had been touting (a new token) before the DAO report was ok," said attorney John Berry, who left the SEC's enforcement in 2019.

Those ICOs who came for the DAO report benefited from some of their grandparents, and remained without staying when they were demonstrably decentralized. Most regulators accept Bitcoin as a commodity, and as the current CFTC chairman gets his way, Ether seems set to receive the same treatment, despite his ICO.

"No, Ethereum can't happen again today, because & # 39; the first part of the Ethereum story, the capital increase, was a security," explained Philip Moustakis, a founder of the Cyber ​​Unit in 39; e SEC & # 39; s law enforcement department to Cointelegraph.

Since the DAO report, the question has been how to create a new token that doesn't work like Bitcoin or even Ether. Despite the anonymity of Satoshi Nakamoto, both networks owe their early years to core developer groups who, if they were to operate in the same way in 2020, may well have the wrath of the SEC.

On the flip side, Peter Van Valkenburgh of Coin Center Cointelegraph told:

"I think you could still do Bitcoin. From the outset of our proponent in this space, we usually have at least one sentence that says, if you want to build really good decentralized networks, Satoshi could build one without a pre-sale . "

However, he agreed that a project like Ethereum, which holds an ICO, would be more problematic than the ICO would happen today.

As an example of a pre-DAO token that still has problems with the SEC, Ripple Labs continues to deny that they were responsible for XRP, a token in which they retain an overwhelming stake. One Ripple executive compared Chevron & # 39; s relationship with oil – a clear attempt to portray XRP as a commodity rather than an investment in Ripple Labs.

But what about the aftermath? Let’s explore some high profile meetings between new tokens and the SEC. and EOS – $ 4 billion net relatively quiet

An interesting case study is that of and EOS., a company that produces open source software, was the driving force behind the EOS ICO. A total of $ 4 billion remembered, it remains the largest ever. In addition, it's an interesting case study both around & # 39; the year-long ICO began just over a month before the SEC released its DAO report, and the company filed an opinion on & # 39; s page for its ICO against US-based investors you don't participate.

The SEC continued investigating the EOS ICO but would end up settling with for $ 24 million. Whether it was just timing with the DAO report, or that the EOS Tokens were not transferable after the purchase period, or the fact that the & # 39; explicit prohibition of & # 39; e FS like China, the SEC did not think a strong case.

"The fact that the SEC settled for $ 24 million – I think that indicates that the SEC saw some risk in its position," John Berry said. In relation to the capital collected during the ICO, $ 24 million is peanuts, the kind of expenses a company would like to incur as an opportunity cost. However, it does not provide security to current projects. came relatively unscathed away from & # 39; e encounter, but the SEC did not admit any public reason.

"I would warn people in the industry against modeling their ICO's to's," said Philip Moustakis. "For me, there is no clear message to take away from At best, we read tea leaves."

Moreover, the arrangement with the SEC is not the end of's potential liability for securities infringements. In early April, multiple class action lawsuits alleging that violated both federal and state security laws in its ICO. These are still in their early stages, but show that the company is not very out of the woods.

In the same vein as EOS, the ICO for Tezos (XTZ) predicts the DAO report. With $ 200 million, it was, at the moment, the largest in history. Although the SEC never filed formal action against the company, a class action accusing US investors in the project accused the Tezos Foundation and affiliate Dynamic Ledger Solutions of securities laws violations. The class is currently finalizing a scheme for approximately $ 25 million. The same case revealed that the SEC is investigating the project on the same charges, and the class action scheme would not necessarily protect the foundation against further SEC pursuit.

The SAFT Framework to Appeal the SEC

During & # 39; 2017, lawyers worked in & # 39; e space for conceptualizing a new framework, a "Simple Agreement for Future Tokens," or SAFT. Several heavy hitters in the industry released a white paper in October. As the EOS project did, the SAFT Framework conceptualized a distinction between the initial sale of rights to tokens and the distributions of & # 39; the tokens themselves.

The first leg would be securities, sold only to "Accredited Investors" with the SEC's D Regulation to make the company free of full registration as a publicly traded company – a step that EOS did not take . That money would go to a registered centralized entity that could use it to build the network on which the tokens would work in a way that of that central entity. The early recognized buyers would be able to sell their tokens to the general public, even in America, as freely as they can Bitcoin. In theory.

The SEC has never formally signed the SAFT Framework. However, statements by Chairman Jay Clayton near the end of 2018 indicated support for the concept that virtual currency can go from securities to non-securities. In June of that same year, William Hinman, head of the & # 39; SEC's fintech office of the SEC, made similar remarks.

However, the SAFT framework has seen mixed results, and recent events suggest that the SEC is fickle when it comes to companies that do not make the switch from initial funding round to token release.

Canadian messaging app Kik got into trouble for using a SAFT in an ICO in September 2017 and remains locked in a dead match with the SEC. However, part of their issue was that the app itself failed, so its Kin token struck much like a lifeboat on a sinking ship instead of a serious project. Kik also had problems with the Canadian equivalent of the & # 39; e SEC.

Often hailed as the great success story of the SAFT era, Protocol Labs managed to raise $ 257 million in an ICO for Filecoin shortly after the DAO report. The company demonstrated its commitment to the SEC and decentralized, enabling the Filecoin network to operate independently, as a mechanism to provide peer-to-peer file storage. Although the SEC is content with Protocol Labs by all accounts, the company has yet to launch its network, the most recent estimate being for Q3.

Launching a mainnet will be the critical test, as Telegram pointed out. Telegram, the most high-profile project to use the SAFT Framework, is also the most spectacular failure and will very possibly be the last.

Telegram and the failure of the SAFT framework

Last week, Telegram announced that it is backing off its planned Telegram Open Network. As mentioned earlier, the ICO for TON & # 39; s own Gram tokens raised $ 1.7 billion before the SEC filed an emergency action that did not stop its distribution in October.

The Telegram case is short and heated. The company tried to follow the SAFT Framework by registering its purchase agreements – NOT the Gram tokens – under a Reg. D exemption. This was effectively a promise to sell those contracts exclusively to accredited investors. The disagreement really starts here.

Per the SAFT Framework, Telegram had hoped the SEC would accept that the Gram itself was not a security. For their part, Telegram agrees that they have made every effort to keep the SEC involved in preventing just this type of action. The SEC's counter argument was that the Grams were still securities, largely because Telegram had no luck convincing the commission nor the judge that the network, TON, was actually complete.

The state of TON is critical to the & # 39; third party & # 39; prong of & # 39; the Howey Test. If the network is still dependent on the development of Telegram, the argument goes, then the Gram tokens still form an investment in the company's work.

The problem is that Telegram worked with regulators in the process. It's ridiculous for potential future companies looking to raise capital to fund projects that a project with the technical and financial support of TON was unable to meet regulators and have to return some money that & # 39; t Endanger Telegram itself.

"The judge basically admits that there would be a crime before there was a crime and therefore intervenes in a way that doesn't send a bad signal to other projects," said Kristin Smith of the Blockchain Association, you wrote multiple amicus curiae letters defending your Telegram in & # 39; e lawsuit. "From our perspective at the Blockchain Association, this is the reason we need an additional regulator and / or legislative solution that doesn't provide a legal path."

What Telegram represents is the launch of a project supported by the Pavel and Nikolai Durov, two brothers who had already launched two massive online platforms (in addition to Telegram, the Russian social media platform, VKontakte). Moreover, TON seems well-intentioned and was clearly well funded, although Telegram has only offered to return some of the & # 39; s invested funds. The fact that the SEC stopped it in its tracks will be disastrous for all future publishers. It's a new era, and the case is still in court.

In his letter announcing the end of Telegram's involvement with TON, Pavel Durov concluded with a desire for future projects:

& # 39; You're fighting the right battle. This battle is perhaps the most important battle of our generation. We hope you succeed where we failed. "

At the moment, no one is sure how to apply this coat. In a fascinating development, the open source version of TON launched shortly before Telegram withdrew its involvement. Although Telegram may be pushing hard to reimburse investors, the functioning of the independent network without Telegram could play very well for its benefit in & # 39; the lawsuit. The SEC's argument assumes that the network is dependent on Telegram's work as a third party. The commission might still maintain that the network was not functional enough to be considered independent from the original launch date. But if TON now works without the active involvement of Telegram, that greatly reinforces their argument that they built a project that would leave the boundaries of the Howey Test.

On the other hand, if the open source network falls apart, the argument of & # 39; the SEC proved that Grams were indeed investments in Telegram and should be treated as securities regardless of & # 39; initial purchase agreements.

Is everything a security by default?

A critical question that still arises is which new projects would be immune to classification as securities.

In October, Cointelegraph spoke on behalf of, US Representative Warren Davidson (R-OH) commented cruelly on & # 39; e position that the SEC has placed new projects in:

& # 39; They are literally told if you want to launch a token, whatever you think you want with it, come first with the SEC. (…) And you can grow. If you grow well enough, we will give you a letter without action. You have hundreds of companies waiting for letters without action. They have approved two. You can't raise capital while you wait there. "

Philip Moustakis stated that the SAFT framework had underestimated the control that the SEC would apply to tokens that the companies hope to issue as non-securities:

"Just because there is a bit of time between the sale of SAFT and the sale of a token does not mean that the SEC will not consider this token separately as a security. (…) Everything I just said is based on the ICO & # 39; s model of 2017, 2018, in which each token represents a share in the issuer, and that is the original sin that should not be addressed. "

For their part, the SEC’s fintech wing, FinHub, declined to comment on whether it is possible to hold an ICO within the U.S. without agreeing to classify it as a security and also refused to address Cointelegraph to anyone who & # 39; t is internally prepared to go on record about recent actions, instead deferring to the same two non-action letters that Davidson referred to in October – TurnKey Jet and Pocketful of Quarters.

Two utility circuits in closed circles have passed the Howie Test as unsecured

Respectively from April and July of 2019, TurnKey Jet and Pocketful of Quarters are the only two who have made the cut of recommendations without action to the commission.

In the case of TurnKey Jet, the commission notes that it sells tokens, so buyers can buy plane tickets for the same price outside bank hours – no expectation of profit, and no wallets outside of the TurnKey system, so the tokens are freely locked in their value of $ 1 and occupy a specific role of convenience for one airline.

Likewise, Pocketful of Quarters provides a gaming platform that offers users unrestricted access to tokens at fixed prices. However, those tokens had no use outside the dedicated Pocketful of Quarters platform had built the platform without funds from & # 39; sales of tokens.

Not one of these ICO's presents any kind of functional cryptocurrency. Instead, they are relatively pedestrian tokens, solvable problems of convenience within closed and fairly limited systems.

Utility tokens like these fit cleaner in Jay Clayton's analogy of the Broadway ticket that people can trade, but that doesn't give you access to just one show. A classic cryptocurrency that people use as payment for services that are not directly derived from the publisher is a more threatening endeavor. In addition, the SEC did not provide formal feedback on the case, so they can withdraw or withdraw any tentative guidance to be derived from these letters without action.

What about the stay of the US?

One difficult element of digital assets is their ability to cross boundaries freely. The US SEC plays a major role in global financial regulation because of the size of the country's economy and investment market.

When it comes to cryptocurrencies, the SEC has potential jurisdiction over any token that could make its way to American investors – seen as the technological slum of many in the crypto world, difficult to avoid. EOS, in fact, tried. Many of the people who are most interested in these investment opportunities are those who are most able to operate via VPNs and other technology that is geographical origin fudges.

Telegram proved in its response to & # 39; preliminary decision of & # 39; a Grams distribution court said that only $ 424.5 million of the $ 1.7 billion they raised was from American investors. They wanted to disperse the remaining Grams, and even offer the protection of "setting the TON digital wallet to avoid U.S.-based addresses."

The court may have reasoned that this was too little, too late. They may also have been skeptical about Telegram's claims, given that they never believed TON in any case.

Probably the most famous example of regulators shutting down an emerging cryptocurrency was Libra, which attacked Congress directly, without requiring the SEC to submit anything. Much to & # 39; the annoyance of & # 39; e House Financial Services Commission, Libra set up shop in Switzerland instead of & # 39; e FS And despite the elaborate schedule of the Libra Association – which tried to spread the responsibility for the authority through an international union of companies and away US registered company Facebook – Congress seemed pretty well set up to on the project by treating it like a Facebook project and bringing in CEO Mark Zuckerberg to testify. Despite recent updates to the white paper, many Libra still want to label a security.

Why not just register as security tokens?

Not surprisingly, security token offerings, or STO's, have taken on a more visible role. They function as recognized securities and use crypto-learned technologies, including blockchain, to provide fast, reliable global trading of assets that do not fall within the purview of the SEC of what constitutes a security.

For example, Blockstack sold $ 23 million worth of its STX tokens after submitting a Reg. A + exemption, a process that probably costs the company millions. No SAFT. STX are functional tokens and remain securities.

For all appearances, Blockstack's approach seems to be working, in the sense that the SEC has not taken any action against the company. However, registration as a security limits the trading options of a token.

Blockstack CEO Muneeb Ali waited for the challenge that STX faces:

“Internationally, in various jurisdictions, it is clearly treated as a utility token – it already trades, for example, on Binance. And we have received legal advice from those jurisdictions, because the regulations are different and currently there is no US exchange for us. But the fact that US exchanges – whether regulated exchanges must exist – has not been issued by the SEC nor for such regulated ATS's (Alternative Trading Systems) as an exchange – or you achieve sufficient decentralization until the point that even in & # 39; e FS, it is clearly a utility and not a security. "

Blockstack's clear goal is to continue decentralizing its token so that it metamorphoses from & # 39; s security status cocoon. Unfortunately, there is no clear template for doing so in the current context of the SEC. This presents interesting hypotheticals.

"Imagine if the company, say Blockstack, decided to dissolve, but the network kept running, because it's not open-source," the Coin Center's Peter Van Valkenburgh theorized about the current state of security tokens. "At that point, it's a bit ridiculous. Who's there to save revelations?"

Many at the SEC are interested in such transitions. In 2018, William Hinman of the SEC's # 39 FinHub commented:

"If the network on which the token functions as a currency is sufficiently decentralized – where buyers no longer expect a person or group to perform essential administrative or entrepreneurial efforts, the assets may not represent an investment contract."

Earlier this year, following the Telegram case, SEC Commissioner Hester Peirce began a safe haven campaign for projects in search of decentralization, but the COVID-19 pandemic seems to be completely erasing the proposal at the moment. ; e radar from & # 39; a committee.

However, given that the conversation around COVID-19 response has changed from emergency action to long-term financial action, we may be about to witness new motions to encourage companies to build and seek capital. For example, the SEC recently released its crowdfunding requirements.

"After the last financial crisis, there was the JOBS Act," Kristin Smith said about Peirce's safe harbor. "A few months from now, I think that's going to be a very live and active conversation."

The death of & # 39; an ICO?

Projects will continue to shape, and if they don't ask for money, they won't have to worry about that question. As Coin Center & # 39; s Peter Van Valkenburgh recently told Cointelegraph:

"Since the beginning of our advocacy in this space, we usually have at least one sentence that says, & # 39; If you want to build really good decentralized networks, Satoshi could build one without a pre-sale. & # 39; "

However, projects that do not seek funding will find a rough path forward. Institutional financial players have been intensively researching blockchain technology for private use, but we are looking at a new era.

We need to be careful whether Blockstack can convert its STX into non-securities, or whether Filecoin can launch its network without an SEC run-in, or even what happens to Telegram and Libra. Without a major change in laws, it is difficult to imagine a new big project coming and transfiguring an ICO into an accepted public currency such as Bitcoin, seen regulatory hawkishness.

While this is not the end of new crypto projects, the window of & # 39; the time when you can request funds to start a new coin and see how & # 39; it left your stable seems to be close. But that's not to say it won't open again.


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