SEC warns market participants in distributed ledger and blockchain tech

Written By: Katherine Demetre
August 10, 2017

SEC blockchain tech

The Securities and Exchange Commission recently issued an investigative report cautioning market participants to be aware that offers and sales of digital assets by “virtual” organizations are subject to the requirements of the federal securities laws.

The commission revealed that such offers and sales, conducted by organizations using distributed ledger or blockchain tech, have been referred to, among other things, as “Initial Coin Offerings” or “Token Sales.”

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 confirmed that issuers of distributed ledger or blockchain tech-based securities are required to register offers and sales of such securities unless a valid exemption applies. The report continued to explain that participants of unregistered offerings could also be liable for violations of the securities laws.

Additionally, securities exchanges provided for trading must register unless they are exempt. The purpose of the registration provisions of the federal securities laws will ensure that investors sold investments that included all the proper disclosures and subjected to regulatory scrutiny for their protection.

SEC Chairman Jay Clayton commented:

The SEC is studying the effects of distributed ledger and other innovative technologies and encourages market participants to engage with us. We seek to foster innovative and beneficial ways to raise capital, while ensuring – first and foremost – that investors and our markets are protected.

According to the commission, the report stemmed from an inquiry that the agency’s Enforcement Division launched into whether The DAO and associated entities and individuals violated federal securities laws with unregistered offers and sales of DAO Tokens in exchange for “Ether,” a virtual currency. The company stated that the DAO would not meet the requirements of the Regulation Crowdfunding exemption.

Stephanie Avakian, Co-Director of the SEC’s Enforcement Division, stated: “The innovative technology behind these virtual transactions does not exempt securities offerings and trading platforms from the regulatory framework designed to protect investors and the integrity of the markets.”

In light of the facts and circumstances, the agency stated that they would not to bring charges in this instance, or make findings of violations in the report, but rather caution the industry and market participants.