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SEC Chairman Jay Clayton’s Remarks on ICOs

In his remarks at a recent Practicing Law Institute program on securities regulation, Securities and Exchange Commission Chairman Jay Clayton once again addressed Initial Coin Offerings, or ICOs.  Mr. Clayton highlighted several issues in particular, including that in his view there is a lack of information about many online platforms that list and trade virtual coins or tokens offered and sold in ICOs, and that trading of tokens on these platforms is susceptible to price manipulation and other fraudulent trading practices.

As we noted previously, in July the SEC released a report of investigation regarding potential federal securities law violations involving a platform called The DAO and its related entities. Although the SEC determined not to pursue enforcement action there, the SEC’s report stated that the digital tokens issued by The DAO in its ICO qualify as “securities” under the Securities Act of 1933 and the Securities Exchange Act of 1934. In the months since, the SEC has taken enforcement actions with respect to several companies that have, or indicated that they were likely to, engage in ICOs, including temporary trading suspensions and a civil complaint.

A key takeaway of the SEC’s report and subsequent enforcement activity is the necessity of considering the securities laws when structuring an ICO. If the token is deemed to be a security, then the ICO must be registered with the SEC under the Securities Act or an applicable exemption from the registration requirements must be available.  As reported by the Wall Street Journal, in unscripted remarks during his PLI speech, Mr. Clayton said that “I have yet to see an ICO that doesn’t have a sufficient number of hallmarks of a security.” Mr. Clayton’s remarks highlight that ICO-issuers should proceed with caution, serving as a reminder that ICO practice and the SEC’s views in this area continue to develop.

© 2017 Proskauer Rose LLP.

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About this Author

Louis Rambo, Corporate Attorney, Washington DC, Proskauer Rose Law Firm
Associate

Louis Rambo is an associate in the Corporate Department and a member of the Capital Markets Group. He concentrates his practice on regulatory matters under the federal securities laws and advises companies on general corporate and transactional issues, including public disclosure, federal and state proxy requirements, debt and equity securities transactions, business combinations and corporate and board governance. Prior to joining the Firm, Louis served as an attorney in the division of corporation finance with the Securities and Exchange Commission.

202.416.6878
Michael Saliba, Corporate Attorney, New York, Proskauer Rose Law Firm
Associate

Michael Saliba is an associate in the Corporate Department and a member of the Private Equity and Mergers & Acquisitions Groups. His practice encompasses general corporate and business law, with an emphasis on advising issuers and investment banks in public and private offerings of equity and debt securities, and providing counseling to corporate clients on an ongoing basis with respect to, corporate governance, securities law compliance and other corporate matters.

212.969.3441