Increased Scrutiny for Virtual Currency Offerings
On September 29, 2017, the U.S. Securities and Exchange Commission (SEC) announced that it had charged two related companies offering virtual currencies with allegedly engaging in illegal unregistered securities offerings and ongoing fraudulent conduct. This appears to be the first time the SEC has formally charged a company for raising money by offering virtual currencies in what is known as an “initial coin offering.”
A virtual currency, also known as a “cryptocurrency,” “blockchain protocol token” or simply a “token,” is a digital representation of value that can be digitally traded and functions as a medium of exchange, unit of account and/or a store of value. Examples of popular virtual currencies are Bitcoin, Ether (Ethereum) and XRP (Ripple).
Underlying contemporary virtual currencies is a technology known as a “blockchain.” A blockchain is a publicly verifiable digital ledger that records transactions made in a virtual currency. The digital ledger is stored across thousands of networked computers, and all transactions are continuously reconciled by each computer participating in the network. Once reconciled, a transaction is added to the ledger using cryptographic techniques that render the ledger effectively immutable.
In an initial coin offering (ICO), a company raises money by issuing its own virtual currency to a participant in exchange for either fiat money (e.g., U.S. dollars) or other virtual currencies (e.g., Ether). Depending on the circumstances of the ICO, the offering of the virtual currency may be subject to securities laws.
Earlier this year the SEC issued a Report of Investigation that determined, for the first time, that virtual currencies could be deemed securities subject to federal securities laws. In the first three quarters of 2017, the total market capitalization for virtual currencies has increased dramatically. Whether settling payments, securing the “Internetm of Things,” or improving land registries, companies are continuing to advance applications of virtual currencies and are likely to continue to look to ICOs for funding.
It is now also clear that regulators will increasingly seek to align virtual currencies within the existing securities legal framework. Organizations and individuals looking to invest in or do business with companies that incorporate virtual currencies and blockchain technology need to keep up to date on this changing enforcement environment. We will continue to provide updates as this space evolves. For more information concerning blockchain and how it can impact your business, please contact Ned T. Himmelrich, and for questions concerning securities offerings and raising capital, please contact Michele Walsh.