The Securities and Exchange Commission (SEC) has sent subpoenas to numerous ICOs as well as their advisors and consultants. The request for information is highly detailed and has been sent as the SEC believe these ICOs to be in direct violation of several U.S. securities laws.
According to a former SEC lawyer the tally of subpoenas stands at around 80. The subpoenas have been sent from multiple SEC offices across the U.S. – San Francisco, Boston, New York - which demonstrates the resources they are putting behind the regulatory clampdown. Many would argue that their efforts are justified and needed considering 46% of ICOs failed in 2017 and many others lost money through hacks and scams.
The information that was requested included the marketing materials used to promote the ICO, details on the cryptocurrencies they have raised, sold and the identity of investors that have bought these tokens. Industry evangelists say worry that for small ICOs sourcing and providing this data to comply with the SEC request is undoubtedly a time-consuming and expensive task.
Due to the borderless nature of cryptocurrencies it is generally not possible to establish a verified identity of the buyers unless strict KYC and AML procedures are in place. This is not common practice for ICOs. Most ICOs containing disclaimers and clickwrap clauses excluding U.S. citizens but undoubtedly many do as they is no way of enforcing this. The EOS ICO was caught out after advertising in New York times square prior to its token sale in June 2017. Despite claiming they would not sell tokens to U.S. investors.
One of the biggest issues with ICOs is that they are raising significant sums of money from successful whitepapers and marketing material. Instead of viable products and strong development teams, the SEC fear these inflated prices and hype driven markets could burn retail investors. The ability to make millions overnight has attracted bad actors that are looking to profit from unsophisticated investors.
SECs Approach Is Changing
Until recently the SEC’s approach to regulating the booming cryptocurrency market has been fairly reserved. Their first announcement came July 26th 2017 where it set precedent by classing the DAO as a security. The DAO (Decentralised Autonomous Organisation) which raised over $140 million last year was designed as a decentralised solution to manage a shared investment fund. The tokens entitled holders to a share of the profits and to voting rights which could ultimately affect the investment strategy of the DAO. However, the project was hacked before it even began for approximately $70 million.
The SEC later halted an ICO that appeared to be fraudulent as well as one called Munchee as it was deemed a security. Despite these clear-cut cases implying many ICOs are securities the number of ICOs have been increasing and it is estimated that $1.5 billion was raised in 2018 to date. The demand for ICOs appears to remain intact for now but whether the SECs actions will stem the flow of new ICOs is less certain.