On November 16, 2018, the Divisions of Corporation Finance, Investment Management, and Trading and Markets of the U.S. Securities and Exchange Commission (“SEC”) issued a Statement on Digital Asset Securities Issuance and Trading, summarizing recent SEC enforcement actions “involving the intersection of long-standing applications of our federal securities laws and new technologies.” While underscoring the SEC’s ongoing support for technological innovation, the Statement also emphasized that market participants must “still adhere to our well-established and well-functioning federal securities law framework when dealing with technological innovations, regardless of whether the securities are issued in certificated form or using new technologies, such as blockchain.” The Statement described five enforcement actions as illustrative of three categories of recurring compliance issues within the SEC’s purview: (1) ICOs and other initial offers and sales of digital asset securities; (2) investment vehicles for investment into digital asset securities, and those who advise others about such investments; and (3) trading of digital asset securities on secondary markets.
The Statement also outlined the settlement structure for resolving cases against companies who conducted ICOs that the SEC has deemed to be unregistered sales of securities in violation of Section 5 of the Securities Act of 1933. The settlement structure involves the following components:
- The payment of a civil penalty;
- Registration of the tokens as a security under Section 12(g) of the Securities Exchange Act of 1934; and
- The institution of a claims process, whereby the company will compensate investors who purchased tokens through the unregistered offering, if the investor elects to make a claim for a refund.
The SEC’s Statement provides useful guidance as to the scope and application of its approach to blockchain issuers and other market participants, including this settlement framework. The Statement also emphasizes the SEC’s continued focus on ensuring the enforcement of the federal securities laws as applied to digital assets and blockchain technology.