The SEC considers the sale of unregistered assets as something illegal or unethical so it sues ICOs that commit these actions.

The U.S. Securities and Exchange Commission (SEC) announced, last January, that two new Initial Coin Offerings (ICOs) completed in 2018 made fraudulent sales of unregistered digital asset securities. Although these ICOs are still waiting for final judgment, the SEC, in both cases, recommended all funds raised by the ICOs be paid back to investors.

The SEC is avoiding, in this way, that more unregistered Initial Coin Offerings sell assets that do not have permissions.

ICOs are a way to fund the early stages of a crypto venture by selling a certain number of tokens created by the startup in advance of product launch. But, sometimes, some of these assets do not have permissions or do not comply with the necessary characteristics so SEC proceeds to investigate these companies.

Since February 6th, almost 5,700 projects have collectively raised over $27 billion since the first ICO in July 2014. But now there is another form of ICOs called initial exchange offerings (IEOs), which capitalize on the sale of exchange tokens specifically. These IEOs have begun to emerge since last year.

The Rules

Token sales of any type that are sold to U.S. residents but are not registered with the SEC violate federal securities laws of that country. For this reason, the companies responsible for these actions are subject to fine.

Between 2016 and 2020, the SEC filed charges against 27 completed ICOs. This number does not include the number of ongoing investigations conducted by the regulator or the cases that have not publicly disclose settlement terms.

This situation has generated greater caution among cryptocurrency investors. According to ICOBench, the total monthly funds raised by ICOs declined from a high of $3.45 billion in 2018 to $18 million at the beginning of 2019.

To analyze companies that conduct unregistered securities offerings, the SEC operates in three steps: disgorgement, civil penalties, and prejudgment interest.

The SEC can also place injunctions and restrictions on an individual’s ability to work in the securities industry or serve as an officer or director of a public company. However, the SEC cannot put people in jail.

The amount of disgorgement, civil penalty, and prejudgment interest has not yet been settled for these two cases. It would be difficult to predict the final decision since each case is different and SEC does not pursue a unique model of suspicious companies.

Something true and very important is that as the number of SEC-penalized ICOs increases, the importance of regulatory compliance for investors strengthens. They want to avoid any inconvenience.

The resolution of the most known and pending cases since 2019, such as Telegram and Kik ICO, will serve investors, shortly, as important references to see the regulatory behavior of the USA.

In this way, the crypto community will learn a little more about the business and financing models of ICO allowed by the SEC, as well as the scope that this entity also gives to blockchain technology and crypto operations.

By María Rodríguez


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