Digital coin offerings are now likely to come under stricter scrutiny as a result of an investigation by the U.S. Securities and Exchange Commission.
In a report issued Tuesday, the SEC cautioned market participants that federal securities laws apply to offers and sales of digital assets by “virtual” organizations, including “initial coin offerings” (ICOs) or “token sales.”
The commission reached that conclusion after conducting an investigation of a token sale in June 2016 by an organization known as The DAO. The sale was conducted through the Ethereum blockchain, a popular form of distributed ledger software, but hackers stole the tokens in question, triggering the SEC investigation.
According to the SEC, the tokens offered by The DAO were securities and therefore subject to the securities laws.
“The innovative technology behind these virtual transactions does not exempt securities offerings and trading platforms from the regulatory framework designed to protect investors and the integrity of the markets,” Stephanie Avakian, co-director of the SEC’s Enforcement Division, said in a news release.
According to Fortune, the SEC’s ruling “likely to jolt the red-hot market” for ICOs and “may dampen enthusiasm for ICOs in the United States, though it will not limit companies from pursuing them overseas.”
Dozens of companies have completed, or are in the midst of, raising hundreds of millions through the ICO process. Smith + Crown, a website that lists recent offerings, includes one from a company called EOS that is valued at $232.6 million, and another worth $153 million conducted by a company called Bancor.
“The proponents of the ICOs typically argue that the tokens they issue are not securities, but are instead a form of credit akin to subway tokens that give owners access to the network,” Fortune said. “At the same time, however, many such tokens are traded on secondary markets and are the source of intense speculative interest, which casts in doubt claims they are not securities.”
The SEC said The DAO would not have been eligible for the crowdfunding exemption to the securities laws because, among other things, it was not a registered broker-dealer.