A Securities Exchange Commission (SEC) official has come forward saying the regulator is working on guidelines that will make it easier for developers to discern whether their ICO constitutes an offering of securities.
According to a November 5th report by Coindesk, The SEC’s director of Corporate Finance, William Hinman made the statement while speaking to attendees at the D.C Fintech Week conference.
"We also will be putting out more guidance, the idea is a plain English instrument that people can look at and they'll bring together sort of my Howey-meets-Gary speech, and that analysis ... We'll elaborate on that in a very plain English way, so 'do I think I have a security offering,' look at that guidance and you should be able to sort things out."
In his comments, Hinman said that the SEC would also provide industry guidance as it pertains to the status of ICOs that are post-offering and already trading on secondary markets. He also elaborated on the sections of the Howey-test rubric that would be clarified as they relate to ICO tokens.
"If someone's offering an instrument for money or other consideration to a third party, and that third party expects the offerer to generate a return or so something that will increase the value of the coin or token or whatever they want to call it, and there's that expectation of return, we're generally going to see that as a securities offering."
Hinman said that in the case where founders are determined to be offering a security, that the SEC would contain in their guidance the correct approach to register their security or apply for an exemption.
No mention was made for when we can expect the SEC to release the guidance.
Potential ramifications for ICOs and exchanges offering and trading illegal securities.
The guidance could have huge consequences for cryptocurrency markets, with hundreds of ICOs having raised more than $21 billion in 2018 alone, many of whom may have been taking advantage of a regulatory grace period that has resulted from interpretation confusion. It would not be outside the range of impossibility that the SEC deems utility tokens an attempted loop-hole designed to skirt literal interpretations of regulations that were designed to broadly capture the asset class.
If the SEC finds that ICOs have ignored the law, even if they obeyed the ‘letter of the law’ (literal law as it is written) but not the spirit of the law (the intent of those who wrote it), there could be a slew of retrospective punitive actions including large fines and disgorgement — the return of all proceeds and gains from the illegal activity to investors. Furthermore, exchanges may find themselves forced to drop a myriad of ICO projects and could also face fines for trading securities without a license.
And that’s before we even get into get into rampant accusations and existing investigations into cryptocurrency market manipulation, and insider trading that could be investigated and forwarded to the legal arms of the US government.