Initial Coin Offerings (“ICOs”) are generating attention from both investors and the SEC. Investors’ interest is indicated by the more than $1.2 billion that ICOs reportedly have raised so far this year. Meanwhile, the SEC has recently asserted its authority in the space, releasing a report stating that digital tokens issued by ICO platform “The DAO” qualify as securities under the Securities Act of 1933 and the Securities Exchange Act of 1934, as investment contracts under the Howey test.
While the SEC is not pursing an enforcement action in this instance, a private right of action under Section 12(a)(1) of the Securities Act could still arise. Going forward, organizations thinking about an ICO should consider, among other things, the following options to address this issue:
- Craft the attributes of the ICO token so as not to implicate securities laws.
- Conduct the offering outside of the United States (although applicable non-US securities laws would need to be considered in that case).
- Structure the ICO as a private placement. Filecoin has raised $52 million in a pre-ICO sale aimed at accredited investors to be SEC compliant.
- If none of the foregoing options are viable, pursue a securities offering registration with the SEC.
While this report may at first appear to create a chilling effect on ICOs, there are actually nuances which should be considered.