Daniel S Alter, former general counsel for the New York State Department of Financial Services (DFS) and writer for Coindesk has suggested that the SEC should consider an amnesty for illegal ICOs.
In his article, he points out that 2017 saw a monumental rise in the number of coin offerings (ICOs). At one point, up to 50 companies a month were raising funds, most of these unregistered.
This changed later in 2017 after the DAO report based on the Howey Test earlier that year in July, resulted in certain tokens being classified as “investment contracts”, thereby becoming liable for US Securities and Exchange Commission’s (SEC) registration.
It took precedent from the famous court case of the WJ Howey Co-owned Florida citrus groves, the fruits from which would typically be considered a commodity when sold on an exchange. However, the Howey Co also leased about half of its groves in order to finance future grove developments. Howey’s own fruit groves, therefore, were found to be tied to its leased groves, which qualified as an “investment contract” instrument – or a security.
According to Alter, 2018 saw a wave of “SEC subpoenas and enforcement actions targeting similar token offerings – many of which smacked of fraud”. The result is that many ICO tokens have seen a fall in value due to reduced liquidity, market instability for existing tokens, and US companies registering overseas where token sales are unrestricted.
Alter suggests that a model amnesty “clean up” plan should be forged between participating ICOs and the SEC in order to integrate the new asset class into the current structure and introduce a mechanism for protecting “legally flawed investments”. Reports suggest that this process may have begun already, with firms and their lobbyists meeting with the SEC to try and effect a regulatory exemption for unregistered security tokens.
Currently, there are five agencies involved in discussing and setting cryptocurrency regulation in the US, including the US Securities and Exchange Commission (SEC), FinCEN, the Commodity Futures Trading Commission (CFTC), the Department of Justice (DOJ), and the Internal Revenue Service (IRS).
This past February, the Commission’s enforcement division announced the Share Class Selection Disclosure Initiative (SCSD Initiative), self-described as a self-reporting initiative that seeks to protect advisory clients from undisclosed conflicts of interest and return money to investors. Those reporting illegal activity under the initiative would be free from penalty themselves.
Alter feels that a similar approach could work with the case of unregistered security tokens by offering an amnesty. He suggests a method of achieving this would be for issuers of unregistered tokens to make a formal presentation to the SEC to replace the “old” tokens for “new” tokens. This could be formulated under section 12 of the Securities Act of 1933 (establishing a cause of action for rescission or damages in connection with the sale of unregistered securities).
“As an incentive to exchange old tokens for new ones, issuers would probably need to offer some additional consideration – possibly paid in new tokens rather than cash in order to preserve the company’s operating capital,” says Alter.
Ethereum is now under regulatory scrutiny by the SEC, which is considering whether it should be classified as a commodity or a security, according to the New York Times. The SEC is likely to use the Howey Test to establish if Ethereum trading qualifies as an investment contract, thus becoming a security.
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