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U.S. SEC Gets Tougher with Crackdown on ICO Funded Startups

Last Updated March 4, 2021 3:48 PM
Jimmy Aki
Last Updated March 4, 2021 3:48 PM

The U.S. Securities and Exchange Commission (SEC) has intensified efforts to crack down on Initial Coin Offering (ICO) funded startups.

The financial regulator who had sent out a number of subpoenas to startups that failed to comply with its rules at the beginning of the year seems to be exerting more pressure on those startups to settle their cases, according to a report from Yahoo Finance .

For the companies, while some have been able to get off the SEC’s hook by quietly refunding investors money and paying a fine, others argue that they have been left in the dark regarding what the agency wants or how to satisfy its demands, according to anonymous sources who spoke on a recent investigation into the matter. Yahoo Finance and Decrypt  conducted an investigation, where they spoke with industry sources, many of whom are employees of companies that have been subpoenaed by the SEC in the past.

ICOs grew in popularity last year, as it became the go-to funding strategy for blockchain startups, who preferred the ease of raising capital compared to the traditional investing route favored by venture capitalists.

In an ICO funding, the startup sells a digital token, typically for use in the future the startup plans to build. In most cases, the companies that run an ICO funding have not yet launched any product, and in some cases, they don’t – period. There is also very little data to back up the legitimacy of startups funded by ICOs. The report quotes blockchain listing service ICO Alert, who has tracked more than 5,000 legitimate ICOs over the past four years.

While startups have been successful in naming their tokens all sorts such as utility tokens or a Simple Agreement for Future Tokens (SAFT), the SEC has been unimpressed with the labeling, weighing each ICO on a case by case basis.

The agency also tagged each ICO offering as securities, making anyone who wants to raise funding through ICOs to be compliant with federal securities law. At a Senate hearing in Federal, SEC Chairman Jay Clayton said he viewed every ICO as security.

For a company issuing a security, the offering must be registered with the SEC or qualify for an exemption—which includes selling to accredited investors, investors outside the U.S. or to certified investors with annual income above $200,000. William Hinman, the SEC’s director of corporation finance provided further clarity in June when he said that, while ICOs are securities, bitcoin and — in his opinion — ether were not.

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