U.S. SEC still fuzzy on whether Tokens are Securities; but clearer on ICO requirements

By Tedra DeSue - November 09, 2017 (cryptovest.com)

The SEC may not have a clear answer on how to treat tokens, but it is continuing to search for ways to keep bad actors from ruining the unregulated, but booming ICO market.

U.S. Securities and Exchange Commission chair Jay Clayton continues to ring the warning bell over initial coin offerings.

During a speech before the Practising Law Institute Wednesday, he spoke about how to create a “thoughtful” approach to transparency that could enhance both governance and investor protection. Included in this topic were ICOs.

Let’s go over some of Clayton’s talking points.

Where’s the info?

In discussing the topic, Clayton said that he was committed to increasing transparency about SEC operations. He said the commission was also focused on transparency efforts that further the long-term interests of retail investors.

Clayton is concerned that there is a distinct lack of information about many online platforms that list and trade virtual coins, or tokens, offered and sold in ICOs. He pointed out that through these platforms, individual investors can buy and sell tokens in the secondary market using virtual or fiat currencies. 

“But investors often do not appreciate that ICO insiders and management have access to immediate liquidity, as do larger investors, who may purchase tokens at favorable prices. Trading of tokens on these platforms is susceptible to price manipulation and other fraudulent trading practices.”

To be, or not be, a security

The SEC recently warned that instruments, such as tokens, offered and sold in ICOs may be securities, and those who offer and sell securities in the U.S. must comply with federal securities laws. 

While it hasn’t provided any more clarity on that, the SEC has cautioned cryptocurrency exchanges must register as a national securities exchange, or operate pursuant to an exemption from registration.

In addition to requiring platforms that are crypto exchanges to either register as national securities exchanges or seek an exemption from registration, the SEC says it will keep on trying to provide clarity for investors about how to treat tokens.

Specifically, the SEC wants to provide clarity to investors on:

• how tokens are listed on these exchanges and the standards for listing; 

• how tokens are valued; and

• what protections are in place for market integrity and investor protection.