The SEC is growing increasingly wary of initial coin offerings — and sounding increasingly likely to step up regulatory action in and around them.
A security by any other name is a security, according to SEC Chief Jay Clayton — and while the coins offered in initial coin offerings may not be exactly the same, they are close enough to merit a much greater level of regulatory scrutiny.
During a speech before the Practising Law Institute on Wednesday, Clayton spoke about how to create a “thoughtful” approach to transparency such that both investor interests are protected and federal and local laws are actually followed through on.
Clayton said that he is specifically concerned about the lack of transparency inherent in a large proportion of online platforms that list and trade virtual coins, or tokens, that have offered and been sold in ICOs.
Clayton further mentioned that these platforms allow individual investors to 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.”
Clayton also reiterated that the tokens and coins sold in ICOs bear more than a passing resemblance to securities, and those who offer and sell securities in the U.S. must comply with federal securities laws.
Simply calling a security a coin doesn’t change that — and the SEC has warned that cryptocurrency exchanges must register as national securities exchanges or obtain an exemption from registration.
Moreover, the SEC is looking for three very specific pieces of clarity — according to Clayton — so they can better protect the interests of investors.
First, they want to know how tokens are listed on these exchanges and the standards for listing. Second, they would like to know the standard rubric by which tokens are valued and (third) what protections are in place for market integrity and investor protection.