While ICOs are a lightning fast way of sourcing capital for startups, the SEC’s report highlights potential pitfalls citing a very interesting case.
Regulators on Wall Street stated that initial coin offerings (ICOs), should be subject to the same stringent safeguards that are in place for the sales of traditional securities.
ICOs have become a bonanza for digital currency entrepreneurs since it allows them to raise millions very quickly by creating and selling digital “tokens” which have zero regulatory oversight.
With the Securities and Exchange Commission (SEC) declaring these tokens as equivalent to securities the need for regulatory oversight is being felt.
“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,” said Stephanie Avakian, co-director of the SEC’s enforcement division.
The decision is a stark reminder to blockchain startups that they cannot ignore investor protections and should be more cautious while raising funds through ICOs in the country.
According to data compiled by Smith + Crown, a crypto currency research firm, by mid-July tech startups had raised nearly $1.1 billion through 89 ICOs this year; this is almost 10 times more than that raised in the whole of 2016.
For the remaining 6 months, there are 110 ICOs in the offing, as per tokendat.io, a website that tracks token sales.
“This is a shot across the bow for many of these ICOs,” said Preston Byrne, a technology attorney who specializes in virtual currencies. “I think it ruins the party in the U.S. for sure.”
A few ICOs have drawn flak since they had failed to accurately disclose their token distribution, including the proportion of tokens be held by founders and whether the offering would be capped.
This is important since many of these tokens are listed and traded on virtual currency exchanges, thereby giving large token holders sufficient firepower, in theory, to control the price.
Critics have also come down on the lack of realistic business plans as well as being led by individuals who do not have enough experience.
The SEC’s decision was released as part of an investigative report into The DAO, virtual organization created in April 2016 by Slock.it, a blockchain company.
The DAO’s was designed on the decentralized crowdfunding model in which anyone could contribute ethereum tokens to be a voting member thereby have an equity stake in the company.
While the company had raised $150 million in May 2016, an anonymous hacker had managed to funnel $60 million of the tokens into a separate account.
Although the SEC did not press civil charges at the end of its probe into The DAO, it has used the case as a cautionary tale for the market.