In an investor alert issued on January 14, 2020, staff in the Securities and Exchange Commission’s Office of Investor Education and Advocacy warned investors in initial exchange offerings (IEOs) to “use caution before investing . . . through online trading platforms.” According to the SEC staff, “Claims of new technologies and financial products, such as those associated with digital asset offerings, and claims that IEOs are vetted by trading platforms, can be used improperly to entice investors with the false promise of high returns in a new investment space.”
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Senior SEC Official Discusses Digital Asset Fund
At a mutual fund industry conference held on December 3, 2019, Dalia Blass, director of the Securities and Exchange Commission’s Division of Investment Management, previewed a new structure for registered mutual funds seeking to invest substantially in digital assets and related investments.
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SEC Staff Supports Blockchain Clearance and Settlement Platform
On October 28, 2019, staff in the SEC’s Division of Trading and Markets provided a no-action letter to Paxos Trust Company, LLC permitting it to pilot a blockchain-based clearance and settlement platform for a limited number of U.S.-listed equity securities for 24 months. The staff’s action enables the further development and commercialization of a blockchain platform for clearing and settling U.S. securities trades.
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SEC Commissioners Testify About Digital Assets
On September 24, 2019, the House Financial Services Committee held an oversight hearing entitled “Oversight of the Securities and Exchange Commission: Wall Street’s Cop on the Beat” in which each of the five SEC commissioners were called as witnesses. While the hearing covered a wide range of issues related to securities regulation and enforcement, it also touched on a number of topics of particular interest to crypto and blockchain businesses, including the application of the securities laws to digital assets.
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SEC and FINRA Staffs Release Guidance on Custody of Digital Asset Securities
On July 8, 2019, the SEC’s Division of Trading and Markets and FINRA’s Office of General Counsel issued a Joint Statement on Broker-Dealer Custody of Digital Asset Securities. The Joint Statement discusses several provisions of the federal securities laws applicable to registered broker-dealers that may be implicated when such entities custody digital asset securities.
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The Initial Exchange Offering
As this short video explains, the “initial exchange offering,” or IEO, is the latest innovation in the offer and sale of cryptocurrencies. By partnering with a crypto exchange to aid in marketing and listing efforts, issuers engaging in an IEO hope to obtain better visibility and liquidity for their products. But like the ICOs they seek to replace, IEOs raise a host of potential issues under the US federal securities laws.
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On Reconsideration, SEC Obtains Preliminary Injunction Against Blockvest ICO
In a case being closely watched by the crypto community, a California federal judge reversed his earlier decision and, on reconsideration, issued a preliminary injunction against ICO issuer Blockvest LLC. Although the SEC has a high success rate in litigated cases, its action against Blockvest was notable because the judge initially declined to grant the SEC’s request for a preliminary injunction, then ruling that “at this stage, without full discovery and disputed issues of material facts, the Court cannot make a determination whether the BLV token offered to the 32 test investors was a ‘security.’” After reviewing new evidence, the judge subsequently reversed his position and found that Blockvest had indeed issued a security.
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Annual SEC Update
The year 2018 was a busy one for the SEC in the digital asset space, with the agency cementing its role as the primary de facto regulator of crypto finance in the United States.
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Congress Considers Bipartisan Bills to Prevent Virtual Currency Manipulation
Congressmen Darren Soto (D-FL) and Ted Budd (R-NC) recently introduced two bipartisan bills to address virtual currency price manipulation and maintain the United States’ leadership in the cryptocurrency industry.
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SEC Plans “Plain English” ICO Guidance
At a recent securities regulation conference, Bill Hinman, Director of the SEC’s Division of Corporation Finance, indicated that the agency intends to release “plain English” guidance around the issue of whether an ICO is a security. The idea behind the plain English guidance appears to be to consolidate the SEC staff’s views into a single “how to” document for use by the lay person.
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