Investigations by the SEC Signal Crypto and ICO Regulations Tightening

The crux of the matter lies on whether tokens issued through the blockchain are securities or "Utility tokens." New regulatory actions from the Securities and Exchange Commission clarify the agency's stance.

An ICO is usually an offering where an organization sells "Tokens," similar to digital credits, for access to a blockchain based service.

In the investigation, the SEC determined that The DAO violated federal securities laws with an unregistered offer when DAO Tokens were offered in exchange for Ethereum.

This was one of the first major enforcement actions towards an ICO by the SEC. If an ICO is raising money, even if it's in a decentralized manner, it is not exempt from compliance with securities regulations.

"In the course of the offering, the company and other promoters emphasized that investors could expect that efforts by the company and others would lead to an increase in value of the tokens. The company also emphasized it would take steps to create and support a secondary market for the tokens. Because of these and other company activities, investors would have had a reasonable belief that their investment in tokens could generate a return on their investment."

The commission found that Munchee's conduct "Constituted unregistered securities offers and sales." Representatives from Munchee agreed to cease and desist all ICO related activities.

Avoiding Securities Classification by the SEC. The standard for determining security classification is the Howey Test.

Whether are not the investor's profits are actually derived from an ICO team is irrelevant.

The SEC Office of Investor Education and Advocacy issued an investor bulletin to help investors identify the warning signs that an ICO is not registered.

Regardless of whether the issuing entity is a traditional company or a decentralized organization, regardless of whether those securities are purchased using U.S. dollars or virtual currencies, and regardless of whether they are distributed in certificate form or through distributed ledger technology, federal securities laws still apply.