SEC Chimes In On “Initial Coin Offerings”
On March 7, 2018, the SEC issued a public statement on potentially unlawful online platforms for trading digital assets.
The statement discusses how online trading platforms have become a popular way investors can buy and sell digital assets, including coins and tokens offered and sold in Initial Coin Offerings (“ICOs”). It clarifies that cryptocurrencies may be subject to federal securities laws and provides notice to investors of potentially unlawful trading platforms.
The SEC notes that digital assets can qualify as “securities” under federal securities laws and that platforms that meet the definition of an “exchange” are required to register with the SEC. Even if an online trading platform does not meet the definition of an “exchange,” other registration requirements may apply.
The federal regulatory framework governing registered national securities exchanges and exempt markets is designed to protect investors and prevent against fraudulent and manipulative trading practices.
To get the protections offered by the federal securities laws and SEC oversight when trading digital assets that are securities, investors should use a platform or entity registered with the SEC, such as a national securities exchange, alternative trading system (“ATS”), or broker-dealer.
The SEC staff has concerns that many online trading platforms appear to investors as SEC-registered and regulated marketplaces when they are not. Many platforms refer to themselves as “exchanges,” which can give the misimpression to investors that they are regulated or meet the regulatory standards of a national securities exchange.
Although some of these platforms claim to use strict standards to pick only high-quality digital assets to trade, the SEC does not review these standards or the digital assets that the platforms select, and the so-called standards should not be equated to the listing standards of national securities exchanges.
Likewise, the SEC does not review the trading protocols used by these platforms, which determine how orders interact and execute, and access to a platform’s trading services may not be the same for all users. Investors should not assume the trading protocols meet the standards of an SEC-registered national securities exchange.
According to the SEC, many of these platforms give the impression that they perform exchange-like functions by offering order books with updated bid and ask pricing and data about executions on the system, but there is no reason to believe that such information has the same integrity as that provided by national securities exchanges.
Consult an FTC compliance lawyer to discuss online trading platforms and the applicability of federal securities laws.
You can read the Commission’s full Public Statement here.
Richard B. Newman is a regulatory defense attorney at Hinch Newman LLP focusing on advertising and digital media matters. His practice includes conducting legal compliance reviews of advertising campaigns, representing clients in investigations and enforcement actions brought by the Federal Trade Commission and state Attorneys General, commercial litigation, advising clients on promotional marketing programs, and negotiating and drafting legal agreements.
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