US District Judge Affirms SEC ICO Regulation Probe Authority

SEC ICO regulation
Image credit: Allen Allen/Flickr

A Shot in the Arm

A judge in a US federal court has ruled that the country’s securities laws cover ICOs. The ruling is a boost for SEC ICO regulation probe authority, since the ruling came in the course of a likely fraudulent Initial Coin Offering (ICO).

ICOs have become widely popular since 2017. Many blockchain-crypto start-ups have raised millions of dollars using this route. The popularity continued unabated in 2018, as a Business Insider article stated. The article quotes a joint report from PwC Strategy and the Crypto Valley Association, which shows that blockchain-crypto entrepreneurs raised US$13.7 billion from ICOs in the first five months of 2018.

ICOs have democratized investment; however, they have operated outside regulations. To do this, they claimed that their tokens only offer access to utilities. The SEC isn’t accepting this argument since they use the Howey test to determine if an investment instrument is a security. They found that start-ups are issuing tokens with promises of future profit. This categorizes those tokens as securities.

SEC ICO regulation
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Image Credit: US Government / Wikimedia Commons

Securities regulations in the US have stringent registration, reporting, and disclosure requirements. Only accredited investors can buy securities because of the need to protect small investors from securities market risks. The SEC found that most crypto start-ups didn’t comply with securities regulations, which are in place to protect investors from scams.

The SEC is investigating many ICOs and existing companies for possible securities violations. Since blockchain-crypto is a new area, regulations are still evolving. Hence, there is uncertainty about whether the SEC can use securities regulations to probe ICOs. The US federal judge ruling affirms the authority of the SEC to investigate ICO regulations.

Needed: Investor Protection

The recent ruling came in course of a criminal case in New York involving a businessman named Maksim Zaslavskiy. He has allegedly defrauded investors in two ICOs, additionally arguing that securities laws aren’t applicable in his case. One ICO was the ReCoin Group Foundation and the other was the Diamond Reserve Club. His investors didn’t receive any tokens, and there was no indication of any actual real estate or diamonds.

Raymond Dearie, the case’s US district judge, has only given his ruling on the question of whether securities law applied in this case. Prosecutors argued that Zaslavskiy offered securities investment contracts; however, Zaslavskiy challenged that. He claimed that these ICOs were currencies, not securities. He also stated that the securities laws were vague, hence they can’t be applied to ICOs.

Dearie rejected these arguments. He made it clear that labeling an investment contract as cryptocurrency doesn’t exempt it from securities regulations. He has deferred to the jury about the fraud, and whether these two ICOs actually were securities. His refusal to exempt crypto from securities regulations is significant. It means that the SEC ICO regulation probes have a sound legal basis.

BlockTelegraph has obtained a press release with statements from James Blakemore, co-founder of Ketsal Consulting; Kendrick Nguyen, CEO of Republic; and Ciarán Hynes, Managing Partner at COSIMO Ventures, who are experts on crypto regulations. They all emphasize the need for transparency. They say that an ICO selling securities should certainly declare that; however, ICOs following regulations have nothing to worry about. They also welcome further clarity while calling on investors to watch out for scam ICOs.


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