The SEC Is Finally Cracking Down On ICOs

The Securities and Exchange Commission repeatedly warned founders of shady initial coin offerings that they must abide by US securities rules - but most have been too busy making money hand over fist to listen.

And now, it seems, the agency is finally ready to drop the hammer.

After announcing a handful of limited actions against suspected ICO fraudsters late last year, the Wall Street Journal reported Thursday that the agency has sent dozens of subpoenas and information requests to the companies and advisers carrying out ICOs, which have already raised nearly $1.7 billion this year. Last year, ICOs raised $6.5 billion despite crackdowns in China and elsewhere.


The subpoenas primarily include demands for information on the structure, sales and pre-sales of ICOs, WSJ reported.

U.S. regulators have repeatedly put cryptocurrency companies and their advisers on notice in recent months about what officials say are widespread violations of securities rules designed to protect investors.

"Many promoters of ICOs and cryptocurrencies are not complying with our securities laws," SEC chairman Jay Clayton said earlier this year. In another speech he said he has instructed his staff to be "on high alert for approaches to ICOs that may be contrary to the spirit" of those laws.

One former SEC commissioner said ICOs are only seeing the tip of the iceberg in terms of civil - and possibly criminal - actions.

"We’re seeing the tip of the iceberg … there is going to be a ton of enforcement activity," said Dan Gallagher, an SEC commissioner from 2011 to 2015 who now sits on the board of blockchain company Symbiont. Mr. Gallagher told an SEC conference in Washington last week that the largely unregulated token offerings are "the freaking Wild West—it is ‘Wolf of Wall Street’ on steroids."

Bitcoin's explosive gains last year helped draw a flood of money into different crypto tokens. Even the most widely hyped (and ultimately successful) offerings often sport nonsensical White Papers. Often, the product exists only on paper. As a result, the market has experienced broad-based losses as the vast majority of offerings have flopped.

Bitcoin dropped last night when the WSJ headline hit. But it has since recovered, suggesting that the pioneering cryptocurrency is growing more confident in the face of intensifying scrutiny of the ICO market...


Furthermore, the vulnerability of crypto tokens to cyber theft has led to roughly 10% of ICO tokens being stolen by hackers.

Evidence that the market is rife with fraud and abuse is beginning to surface.

A soon-to-be published Massachusetts Institute of Technology study of the ICO market estimates that $270 million to $317 million of the money raised by coin offerings has "likely gone to fraud or scams," said Christian Catalini, an MIT professor.

The SEC has so far brought only a handful of cases alleging cryptocurrency frauds, as officials have raced to keep pace with token sales in the last 18 months.

In January, for instance, the SEC halted the coin offering of Dallas-based AriseBank, accusing the company and its executives of conducting a scam and misleading investors with claims it was buying a federally insured bank. The group claimed to have raised $600 million.

At least a dozen companies have put their initial coin offerings on hold after warnings from the SEC, according to Robert Cohen, the head of the SEC's cyber-enforcement unit.

Specifically, the SEC is focusing on what are called "simple agreements for future tokens" - or SAFTs - which allow companies to hold presales before their tokens have even been created. Many investors who participated in the Tezos ICO - which raised an at-the-time-record-breaking $230 million - are now suing the company after it failed to deliver its tokens on time.

One study estimated that nearly half of ICOs launched last year have failed already.

The Cardozo Law School in Brooklyn issued a report last year claiming these simple agreements for future tokens could violate SEC rules, while also increasing the likelihood that investors are cheated out of their money.

Many of the cryptocurrency-related subpoenas were issued in recent weeks, likely paving the way for what lawyers and industry insiders expect to be a dramatic upturn in enforcement activity.

The SEC scrutiny is focused in part on “simple agreements for future tokens,” or SAFTs, which are used in some of the most prominent crypto-fundraisings, according to the people familiar with the matter.

The agreements allow big investors and relatively well-off individuals to buy rights to tokens ahead of their sale. The rights can be traded, or flipped for profits, even before the sale begins.

The SEC is concerned that such agreements are potentially being used to trade like securities without conforming to the strict rules that apply to securities.

Recently, messaging app Telegram has grabbed headlines after raising nearly $1 billion in a VIP presale for what's expected to be the largest-ever ICO (by a considerable margin).

The offering is expected to raise at least $2 billion, even though the company doesn't have a clearly defined plan for monetizing them, and it's unclear what the tokens will be used for or how their value will be determined. Certain influential individuals in the crypto space have expressed concern that a growing secondary market for presold Telegram tokens risks harming the broader crypto market.

"This feels like Wall St. It’s gross. It’s shady. It’s not what blockchain technology or ICOs were supposed to be about," Jeremy Gardner, a co-founder of hedge fund Ausum Ventures, tweeted in February.





Indeed, there's so much money flowing into ICOs, that a company can successfully raise $50 million without having anything even approximating a viable product, Gardner said.



Still, it remains to be seen if the SEC stepping up enforcement would have a lasting impact on the market. After all, companies can always relocate to a more permissive jurisdiction - though the SEC can certainly make it difficult to sell those coins to investors based in the US.

Following reports of the subpoenas, revealed in a securities filling on Thursday that its $250 million ICO for its tZero alternative trading platform has been "under review" by the SEC, according to CoinDesk. Overstock raised $100 million during its presale, and recently began the second phase of its token offering.

The filing reads:

"The SEC is trying to determine whether there have been any violations of the federal securities laws, the investigation does not mean that the SEC has concluded that anyone has violated the law.  Also, the investigation does not mean that the SEC has a negative opinion of any person, entity, or security."

In response, Overstock shares have fallen 10%


Regardless of the outcome, one thing is certain: Whatever form these actions might take, they're long overdue.


Buckaroo Banzai tmosley Thu, 03/01/2018 - 09:51 Permalink

Can't find something that isn't there, tmosley. Isn't it time to admit that Bitfinex'ed was just part of an elaborate FUD scheme to dump the crypto complex and buy coins cheap? Honestly I can't blame whoever perpetrated the scheme, the valuations needed to come back down to reality, and somebody was going to profit from it. But let's stop pretending that there was any truth to it, because if there was, it would have come out in the wash already.

In reply to by tmosley

Ramesees The_merovingian Thu, 03/01/2018 - 11:50 Permalink

Bitmex did diligence on Tether - it's published on their website. They found no issues. 


That was an impressive scam by Bitfinex'd. 


Tmosley - are you still effing around with shitcoins or have you realized that uncensorable value transfer ie Bitcoin is the only crypto that matters. When Vitalik Buterin can fork the Ethereum network and take away your money (as he threatened to do to Gab because he doesn't like their politics) it makes Ethereum unusable in my opinion. 


Blockchain actually isn't interesting technology, despite what the morons have been saying for 2 years "It's not Bitcoin, it's BLOCKCHAIN that's going to change the world".  Hah - it's only the decentralization of Bitcoin that is interesting.


Other non premined nonscamcoins that have some use are: Sia, XMR, LTC. There are a few more but I'm too busy to research. Don't by anything McAffee Pumps. Everything else is hogwash. 

In reply to by The_merovingian

PrezTrump Buckaroo Banzai Thu, 03/01/2018 - 10:42 Permalink

Tmosley got played by the whole bcash thing. Tmosley dumped all his bitcoin and moved to bcash! And last he said he was totally out of crypto, right at the bottom!!! The posts are out there.  He doesn't know shit.  Just another asshat prognosticating from his basement throne.


I have been saying to buy since the bottom.  Here we are up 100% and more on various positions. But whatcha gonna do

In reply to by Buckaroo Banzai

buzzsaw99 Thu, 03/01/2018 - 09:03 Permalink

"We’re seeing the tip of the iceberg … there is going to be a ton of enforcement activity," said Dan Gallagher, an SEC commissioner from 2011 to 2015 who now sits on the board of blockchain company Symbiont. Mr. Gallagher told an SEC conference in Washington last week that the largely unregulated token offerings are "the freaking Wild West—it is ‘Wolf of Wall Street’ on steroids."


omg, an sec fraudster cum blockchain fraudster calling icos a scam. no conflict there whatsoever.  pot calling kettle, mr. kettle, mr. pot says you are black.

Aubiekong Thu, 03/01/2018 - 09:07 Permalink

Translation - Banks are scared shtless.  They see their future monopoly crumbling as block chain will replace them.  And the elite wont let that happen now will they...

cro_maat Aubiekong Thu, 03/01/2018 - 11:42 Permalink

They are desperate to move their worthless fiat into crypto but need the prices to be low. Hence the fear mongering.

The SEC already admitted that they only have jurisdiction if an ICO or existing token doesn't pass the Howie test. The gray area seems to be the pre-sales.

The crypto world will adjust if they go after the pre-sales. We will see all new tokens issued as utility tokens with not property rights or profit share. The smart ones will do the pre-sale with the proper paperwork and a VC backed tranche.

In reply to by Aubiekong

MK ULTRA Alpha Thu, 03/01/2018 - 09:10 Permalink

Too many complained to the SEC, that they were robbed. So the firms will be fined and the money? the government always keeps it. Fines? who knows, but if it's a large fine, well they're being driven out of business, if it's a small fine, then that's to show the SEC did something(the SEC feels the pain of your loss, so we'll sue them and keep the money)

Or it could be the SEC is motivated by the US banking sector because of competition.

This could be the first round of shutting the whole industry down.


cro_maat MK ULTRA Alpha Thu, 03/01/2018 - 11:47 Permalink

The Genie is out of the bottle.

The SEC, CFTC, FED et al cannot shut down this movement. Decentralized ecosystems are here to stay.

Even if Blockchains LLC in Sparks, NV turns out to be the largest crypto mining company on the planet backed by CBs and they try to corner the market on major cryptos, the community will shift to uncompromised blockchains or create new ones.

In reply to by MK ULTRA Alpha

shizzledizzle Thu, 03/01/2018 - 09:17 Permalink

Yea, anything to avoid cracking down on the VOL manipulation case they had dropped in their lap. "We looked into and decided not to  investigate any further when we made a call and the person on the other end said Good afternoon, New York Fed trading desk. How can I help you?"

ultraticum Thu, 03/01/2018 - 09:20 Permalink

Here comes the Keystone Cops.  Here to "protect" us (from freedom of action and freedom of consequence).


The idiots are always going to be fleeced . . . but in our case those idiots appear to be the Merckans who universally believe in the validity of centralized plunder from the Imperial City.

Snout the First Thu, 03/01/2018 - 09:22 Permalink

Ah heck. And I was just about to launch SnoutCoin. It has twice the backing as Bitcoin ( 2 x zero is still zero ), and I promise I won't issue more than 20,999,999 of them.

_SILENCER Thu, 03/01/2018 - 09:59 Permalink

Seems a lot of the old out of touch skyscraper people aren't happy about missing out on the Crypto gold rush.

Crash the shit out of it, make examples out of some scammers, scare the emotional money away, then scoop it up by the handful and run it back to the stratosphere.

adr Thu, 03/01/2018 - 10:45 Permalink

It must be awesome to say you are going to have a product, but never really explain what it is, BUT JUST SAY IT'S GOING TO REVOLUTIONIZE SOMETHING, and be handed a few billion dollars in value.

Does this ever actually work long term?

2018 is when the Cryptocons must prove that there is value to their concept.

Bitcoin has been around for nearly a decade without being truly adopted by anything mainstream. It only took two years for the modern internet to reach mainstream saturation. Windows 95 brought AOL, Prodigy, and Compuserve from geek playtools to millions of mainstream users. By the launch of Windows 98, nearly everyone was online and "You've Got Mail" was so pervasive that they made a major Hollywood movie with email and internet relationships as the main storyline.

Imagine if ten years later the iPhone was still just a niche underground communication device.

Some people say that Bitcoin and cryptos are more like the 300 Baud modem and it will take a long time for the technology to mature. That isn't the case today though. Tech advances at light speed compared to the early computing age. We are 2G to 5G in less than ten years. It took nearly 15 years for modems to go from 14k to 28k, but then 56k to ADSL and cable with MB speeds happened in a flash.

Blockchain tech should already be everywhere after a ten year incubation.

HenryHall Thu, 03/01/2018 - 11:17 Permalink

>> U.S. regulators have repeatedly put cryptocurrency companies and their advisers on notice in recent months about what officials say are widespread violations of securities rules designed to protect investors.

Do they think that Satoshi Nakamoto is a company?


And why would anyone of sound mind use a company if all they wanted was to issue blockchain tokens?

I guess the answer to that is - anyone who wants to get sued!

Spaced Out Thu, 03/01/2018 - 12:12 Permalink

SEC: "Hey Poloniex, nice exchange you've got there, it'd be a shame if something terrible happened to it.

"How about you sell that exchange to a buddy of ours and we don't come after you on unspecified charges and tie you up in court for the next decade?"

Poloniex: "Deal".