Initial coin offerings (ICOs) burst onto the business financing scene several years ago. The coins, often called tokens, involved in these offerings are commonly referred to as cryptocurrency. The proponents of this type of offering claimed that initial coin offerings were not offerings of securities and could be used to raise money without the constraints of the securities laws. By mid-2017, the Securities and Exchange Commission had thrown cold water on this idea. Nevertheless, companies continued to try to raise money by selling ICOs.
The Securities Division of DFI brought its first enforcement action in April of 2019, entering into a consent order with a company that had been trying to raise money to fund its investment business. The same month, the Securities Division entered a statement of charges against another local company, which offered coins to fund its real estate brokerage business catering to Chinese investors seeking to buy U.S. property. The Securities Division entered into a consent order with this firm in July 2019.
Issuers of ICOs have become more sophisticated than they once were. Most accept that ICOs are offerings of securities and seek to rely on exemptions from registration for those offerings. However, some issuers still have a tendency to make unsupported claims of future profit for those who purchase the investments they are offering. The comparative novelty of cryptocurrency as an investment has also created regulatory issues relating to trading of cryptocurrency and custody of cryptocurrency held in connection with trading activities.
The Securities Division took enforcement action in two more cases relating to cryptocurrency in 2019 and has already taken enforcement action on two more in 2020. In November 2019, the Securities Division entered into a consent order with a company that was acting as an unregistered investment adviser to a cryptocurrency fund. In December 2019, the Securities Division issued a statement of charges against a company that sold its tokens to fund the building of a digital platform to connect cannabis consumers with cannabis retailers. In February 2020, the Securities Division entered into a consent order with a firm that raised $30 million through a series of offerings of tokens. The following month, the Securities Division issued a statement of charges against two related companies who offered tokens, which they claimed were going to be the exclusive digital currency accepted by a popular ridesharing company.
The cryptocurrency scene continues to evolve. In January 2020, the Securities and Exchange Commission issued an investor alert on initial exchange offerings, which are similar to initial coin offerings but are offered directly by online trading platforms on behalf of issuers.
Learn more about ICOs: https://www.nasaa.org/investor-education/multimedia-library/nasaa-videos/#