Two Sides of the Coin: SEC Cautions Investors and Issuers in Initial Coin Offerings

By: Stuart H. Gelfond, Lee T. Barnum, Craig R. Bergmann

Recently, the Securities and Exchange Commission (the “SEC”) issued two publications relating to initial coin offerings, or “ICOs”: The SEC's Office of Investor Education and Advocacy published an investor bulletin (the “Investor Bulletin”) highlighting the risks of ICO investing and providing guidance for potential investors before investing in an ICO, and the SEC's Division of Enforcement (the “Division”) issued a report of investigation (the “Report”) concluding that an issuance of tokens by a virtual organization in its ICO may have violated U.S. federal securities laws.  Both the Investor Bulletin and the Report address the possibility that an offering of virtual coins or tokens may constitute an offer of securities requiring registration under the U.S. federal securities laws, warning investors of the risk of loss of their investment even if the protections of the U.S. federal securities laws apply and would-be issuers or other participants in ICOs that they may run afoul of the registration requirements of the Securities Act of 1933 (the “Securities Act”).  While the Report did not reach a conclusion as to whether The DAO was an “investment company” within the meaning of the Investment Company Act of 1940 (the “1940 Act”), it cautioned other virtual organizations contemplating ICOs to consider their obligations, if any, under the 1940 Act.

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