As we have previously blogged, state and provincial securities regulators across the U.S. and Canada have been actively policing the marketplace for ICOs and security token offerings, supplementing efforts at the federal level in the United States undertaken by the SEC. Texas and Massachusetts have been particularly active on this front, and New York recently issued a blistering report on the status of crypto exchanges. Colorado and North Dakota are among the latest states to announce enforcement actions against crypto businesses.
Recently, Colorado has initiated several administrative actions known as show cause orders, and has issued two cease and desist orders regarding potentially fraudulent securities offerings in Colorado in the form of ICOs. North Dakota has issued an advisory alert, and commenced enforcement action against ICO issuers both in October and September. Some of the companies North Dakota targeted were also subject to securities enforcement action in other states as well (including Colorado), further evidencing the coordination among state “blue sky” regulators.
These latest actions again underscore the risks to ICO issuers who do not comply with applicable securities laws. There are two simple rules at play. First, if a financial instrument is a security—irrespective of what it is called or how it is marketed—its offer and sale must be registered with the SEC and applicable states, or an exemption from registration must be available in each affected jurisdiction. Second, all marketing efforts, whether in written documents or oral statements to potential investors, must neither omit nor misstate any material facts about the offering.