Tuesday, September 5, 2017

Is Anybody Surprised that the SEC is Interested in Blockchain and ICOs?

If you haven’t heard of Blockchain or, like most of people, if you’ve heard of it but still don’t understand what it is, it is essentially a decentralized (or “distributed” in computer speak) digital way to record transactions across many computers. This makes it very difficult to alter the record later and facilitates easier verification of transactions.  There are both open “permissionless” blockchain networks and private “permissioned” blockchain networks.

I’m not going to try and explain the details regarding transactions, blocks, batches, encoding, hashes and links, mostly because I’m not really sure I understand them; the technical speak makes my eyes glaze over pretty quickly. What I can tell you is that there are major applications of blockchain being used in cryptocurrencies (e.g. BitcoinDashBlackcoin) and many industries (including banking and insurance) are using or at least exploring the use of blockchain. Even the Big 4 accounting firms are experimenting with Blockchain.

One interesting development, at least if you’re a securities lawyer who works with emerging businesses, is how Blockchain has led to a new type of fundraising activity, the Initial Coin Offering (ICO). In an ICO, a virtual organization (one related to the Blockchain universe), creates and offers for sale a digital “coin” or “token.” This is much like the offering of stock in a public offering except the investor receives the coin/token instead of a security. At least that was the position of those crypto companies engaged in ICOs (here's a resource that shows the current market capitalizations of several). The SEC recently published its report indicating the offers and sales of digital assets by at least one virtual organization (The DAO, for Decentralized Autonomous Organization) was subject to the requirements of the federal securities laws.

While there has been plenty of debate about whether the SEC ruling means that all ICOs are in trouble (or whether it only spells trouble for The DAO), the bottom line is that the SEC has—not surprisingly—taken an interest in this activity. If the SEC were to apply its position more broadly to all ICOs, issuers of blockchain-based securities will either need to register those sales or have a valid exemption (just like other equity offerings).

1 comment :

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