By Tim Byun, the CRO of OKEx
Disclaimer – Thoughts and opinion are of my own and does not represent legal advice.
The purpose of these comments is to share my thoughts on the US Securities and Exchange Commission’s (SEC’s) release on July 25, 2017, titled “Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO.” Here’s a quick recap of what it means to future Initial Coin Offering (ICO) issuers, investors and exchanges.
Finding: DAO Token is a Security
The SEC has provided clarity on one token, the DAO Token. The SEC has not stated that all tokens are securities, though many could be defined as a security based on the SEC’s four criteria highlighted on pages 11 to 15 of the report. One criteria, B.3, states that investors who purchased DAO Tokens were investing in a common enterprise and reasonably expected to earn profits through that enterprise. Future tokens may not fit that criteria. For example, token purchasers may not expect to earn profits and instead expect access to the future utility the underlying token provides.
Impact: Small US Investors Blocked from ICOs
If a token is a security, ICO issuers that offer and sell securities in the US must either register with the SEC or meet registration exemptions. Many will seek the exemption route, which will result in limiting investors to those that are “accredited” or basically known as wealthy and sophisticated investors.
Impact: US ICO Issuers to Leave US
If a token is a security, ICO issuers could skip the exemption or registration entirely and move their token issuance activity outside of the US along with boycotting or excluding US investors to comply with the SEC’s rule.
Impact: Increase Underwriting Costs
If a token is a security, the time and cost to underwrite token issuance will increase significantly. The ICO platform service providers (e.g. underwriters) can still provide a valuable service; however, costs will increase to ensure that these regulatory mandates and exemptions are properly followed.
Impact: US Token Exchanges to Register or Move Outside the US
If a token is a security, a token exchange must register as a national securities exchange in the US or be exempted from such registration. An immediate impact will be that an US exchange will delist tokens that are defined as securities. In the long term, US token exchanges are likely to move outside of the US and not serve US customers.
Conclusion: There will be a calm-after-the-storm. While many industry participants and observers may disagree with the SEC’s assessment, the Securities Exchange Act must be adhered when applicable. I encourage the SEC to conduct additional reports, perhaps with the focus of identifying one, several or many tokens that are not securities for the benefit of investors, issuers and exchanges.
July 26, 2017