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Piecing Together the SEC’s Framework for Evaluating Initial Coin Offerings

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Home Perspectives Piecing Together the SEC’s Framework for Evaluating Initial Coin Offerings
As capital continues to flood into initial coin offerings and cryptocurrency markets, the U.S. Securities and Exchange Commission has sought to apply the existing securities laws and regulations to novel digital assets. In the past few weeks, the SEC filed a complaint against PlexCorps for violating the securities laws in connection with its PlexCoin ICO, and issued a cease-and-desist order against Munchee Inc. to halt the Munchee ICO. SEC Chairman Clayton released a statement shortly after the issue of this order to explain that many digital assets qualify as securities and issuers must comply with applicable laws and regulations. In this client alert, we highlight the key takeaways for token issuers and market participants.
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Nearly five months after issuing the 21(a) Report on the initial coin offering (ICO) of “The DAO,” a decentralized autonomous organization,1 and affirming its jurisdiction over cryptographic assets, the U.S. Securities and Exchange Commission (SEC) has now brought three enforcement actions involving ICOs, and its framework for evaluating these offerings is coming into focus. The first such action, against Maksim Zaslavskiy and involving cryptographic tokens purportedly backed by non-existent diamonds and real estate, is pending in federal court,2 while, in the past few weeks, the SEC filed a complaint in federal court against PlexCorps3 and issued an order instituting cease-and-desist proceeding against Munchee Inc.4 for offering tokens that allegedly qualify as unregistered securities. The SEC’s chairman, Jay Clayton, issued a warning to main street investors and market professionals about the risks of investing in cryptocurrencies and ICOs shortly after the issue of this order.5