Yesterday the SEC issued a report of investigation finding that DAO Tokens are securities under U.S. law. This report sent shock waves across the crypto sector leading to roughly 10% declines in the major cryptocurrencies. I must have received a dozen or more emails from people saying that “ICOs are over.”
I don’t think ICOs are over. I think regulatory clarity is going to be good for the crypto sector long term and while this report does not give us total regulatory clarity, it does give us some very valuable insights into what the SEC is thinking about tokens.
Specifically, we now know that:
- The Howey test is the regulatory framework through which to evaluate whether a token is a security.
- A token that return profits to holders will be considered a security.
We likely know a lot more regarding jurisdictional issues and what the SEC is going to regulate and what they are not. But I will leave it to the lawyers and other SEC watchers to weigh in on that. I am not a professional and don’t want to pretend to be.
At USV, we have been urging our portfolio companies and others in the crypto sector to get good legal advice before embarking on an ICO, investing in ICOs, and more. That legal advice, given as far back as several years ago, more or less anticipated much of what was in this report.
You could see this coming if you did your homework. None of this is surprising to me and to most of the folks in the crypto sector who have sought legal counsel on these matters.
In fact, if you look at all of the regulatory actions that have been taken in the US over the life of cryptocurrencies, you will see that it has mostly been straightforward application of existing laws, on AML, KYC, taxes, securities, etc. Almost all of this could be, and in many cases, was anticipated by those who took the time to consider what the regulators might do and would do.
None of this means that the crypto sector in the US (or elsewhere) won’t be harmed by bad regulations. That has always been a big risk to the sector and remains one. Regulators must be careful to “do no harm”, here in the US and elsewhere. To date, I would say they have done a good job on that. I encourage them to continue that track record.
But mostly I would encourage all entrepreneurs, investors, and others who are actively participating in the crypto sector to get good legal advice before doing anything significant. The regulators are watching. Closely. So know the rules and play by them.