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The ICO market should work on a framework to build a clearly defined scheme for ICOs, recognizing that they are securities.

Posted on March 27, 2018 at 11:15 PM

The ICO market should work on a framework to build a clearly defined scheme for ICOs, recognizing that they are securities.

The ICO process should be designed in collaboration with regulators to comply with U.S. securities law. Existing financial institutions and regulators will not scuttle existing methods of raising capital or attempt to squeeze ICOs under traditional securities law.

Should we paint all ICOs with the same brush by claiming each one of them offers securities subject to SEC scrutiny? On Ripple's XRP "digital asset" door, even though there was no formal ICO to launch that token, it now trades on 18 exchanges.

Now, after raising nearly $94 million of venture capital, Ripple probably does not need an ICO.

One ICO was recently "gate-keeped" by Perkins Coie LLC. It involves the sale of a utility token that raised $35 million in less than a minute. These tokens created a digital advertising ecosystem tied to consumer attention which is why it is styled the “Basic Attention Token.” This ecosystem is an upgrade from the digital advertising scheme ecosystem of 1990s.

The plaintiff's bar has been alert when the SEC has not yet moved. See Davy v. Paragon Coin, Inc., et al., Case No. 18-cv-00671 (N.D. Cal.January 30, 2018) and Paige v. Bitconnect Intern. PLC, et al., Case No. 3:18-CV-58-JHM (W.D. Ky. January 29, 2018).

On February 6, SEC chairman Jay Clayton acknowledged that the potential derived from blockchain was "very significant." Still, Chairman Clayton said the SEC would continue to "crack down hard" on fraud and manipulation involving ICOs offering an unregistered security. Chairman Clayton said the SEC was "working the beat hard" to crack down on ICOs, but chose not to answer a question, namely whether the SEC will "go back" and scrutinize earlier ICOs. I

n other words, there may be some ICOs that the SEC will not attack, Notwithstanding Clayton's comment that "every ICO I've seen is a security, some 2017 ICOs raising hundreds of millions of dollars will not be addressed by the SEC! This provides a clear "nudge wink" that not all ICOs come under SEC regulatory control. As with XRP and BAT, there will likely be many more tokens built on disruptive blockchain initiatives that escape SEC scrutiny given they are not perceived as securities.

The fact that the SEC has not done anything, despite moving against Munchee, Inc., signals the SEC will temper its enforcement activities when faced with a disruptive blockchain initiative that begets true intrinsic value. In other words, utility tokens may be a good idea after all.

Categories: S.E.C., Reg A+, New Capital Options

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