There are plenty of upsides to Initial Coin Offerings: the distributed ledger technology that undergirds them, the disruptive promise of blockchain, the cool name. But the true draw was the complete and utter lack of regulation.
Want to raise $185 million in digital tokens that “do not have any rights, uses, purpose, attributes, functionalities or features, express or implied, including, without limitation, any uses, purpose, attributes, functionalities or features” on your platform, and do so without attracting the ire of the oppressive securities regulation apparatus? Hit the ICO market! Hell, it's even bigger than venture capital at this point.
But those go-go days might soon be over. Now that the SEC has spent a few months looking into the ethereum group known as the DAO – which had $55 million in tokens stolen in a hack last year – it's decided what looks like a securities offering and sounds like a securities offering is very likely a securities offering:
The Securities and Exchange Commission issued an investigative report today cautioning market participants that offers and sales of digital assets by "virtual" organizations are subject to the requirements of the federal securities laws. Such offers and sales, conducted by organizations using distributed ledger or blockchain technology, have been referred to, among other things, as "Initial Coin Offerings" or "Token Sales." Whether a particular investment transaction involves the offer or sale of a security – regardless of the terminology or technology used – will depend on the facts and circumstances, including the economic realities of the transaction.
The SEC's Report of Investigation found that tokens offered and sold by a "virtual" organization known as "The DAO" were securities and therefore subject to the federal securities laws. The Report confirms that issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies. Those participating in unregistered offerings also may be liable for violations of the securities laws. Additionally, securities exchanges providing for trading in these securities must register unless they are exempt. The purpose of the registration provisions of the federal securities laws is to ensure that investors are sold investments that include all the proper disclosures and are subject to regulatory scrutiny for investors' protection.
Ah well, narcs gonna narc. It was fun while it lasted.