On Monday, January 22, 2018, SEC Chairman Jay Clayton expressed the SEC’s growing concern with ICOs and other cryptocurrency offerings being issued and sold without complying with securities laws. Chairman Clayton also warned/scolded the professional advisors connected to these offerings. The full text of Chairman Clayton’s statement is available here.
Compliance with securities laws can be complicated, and determining what is a “security” and what is not a “security” is often based on a legal analysis applying the “Howey Test“, and other relevant factors. In providing advice to clients, we advise them that they must follow the law and can point to various legal cases and articles that describe applicable law. In many cases, however, we have to point out that the law in this area can be open to interpretation. As the Supreme Court has stated, securities laws apply to “virtually any instrument that might be sold as an investment.”
Chairman Clayton, in his statement, made it clear that the SEC’s approach to compliance with securities laws will be to apply the law broadly with respect to ICOs and other cryptocurrency offerings that are “contrary to the spirit of…securities laws” (emphasis added). Following the “spirit of the law” is certainly appropriate if one is delivering a sermon on a mountain, but it is difficult to advise clients what applicable laws will be applied when the SEC is shooting with a blunderbuss rather than a sniper rifle. The problem with such an approach is the potential for collateral damage – actions brought against innocent parties. And while innocence is its own defense, anyone who has been involved representing clients in an SEC investigation can tell you that, innocent or not, investigations can result in critical wounds (in cost, stress and time) in and of themselves. Going to prison for 20 years for knowingly violating securities laws versus accidentally violating the “spirit of the law” is a scary scenario.
What does this mean to you? Know that the SEC sees the securities law more as “black and white” than grey. If your attorney has advised you that there are arguments on both sides as to why an ICO or other cryptocurrency may be (or may not be) a security, now is not the time to push the limits. The SEC will likely disagree with any such analysis and could bring criminal charges. For now, let other intended and collateral targets be hit and the law be better clarified. If you are moving forward with an offering and treating the offering as a security, then you may have less to worry about (though obviously there are many compliance requirements).
In any event, consult with an attorney early and often. This release from the SEC changes the legal landscape, and developments in this area are coming fast and furious, so it is always in your best interest to speak to experienced counsel to ensure you benefit from the most up-to-date information and analysis.