SEC warns crypto-currencies may be securities, cautions investors to avoid scams

AP Explains-Bitcoin Civil War
At a bitcoin conference and trade show in New York.

The Securities and Exchange Commission has waded into the sea of bitcoin and other virtual currencies, saying some of these offerings may qualify as securities.

In a report released this week, the SEC contended that some “initial coin offerings,” or ICOs, for crypto-currencies may be subject to its oversight, thus requiring all the filings and disclosures that go along with federal regulation.

“In certain cases, the tokens or coins will be securities and may not be lawfully sold without registration with the SEC or pursuant to an exemption from registration,” the agency said in an investor bulletin.

Tech firms have raised about $1.1 billion in 89 initial coin offerings so far this year, roughly 10 times more than the amount raised in the whole of 2016, according to data compiled by Reuters. And there are 110 upcoming ICOs this year alone, according to tokendata.io, a website that tracks crypto-currency sales.

The SEC highlighted a 2016 offering known as “the DAO” that was built atop the ethereum blockchain, a popular form of distributed-ledger software. Hackers stole about one-third of DAO tokens, and the fallout triggered an SEC investigation.

According to the 18-page report issued by the SEC on Tuesday, some virtual token and coin companies that raised money through the sale of digital assets must adhere to federal securities laws — although it did not specify which companies. Nor did the SEC say it was trying to shut down crypto-currencies and their exchanges.

“The federal securities laws provide disclosure requirements and other important protections of which investors should be aware. In addition, the bulletin reminds investors of red flags of investment fraud, and that new technologies may be used to perpetrate investment schemes that may not comply with the federal securities laws,” the agency said in an accompanying news release.

The securities regulator has not waded into the bitcoin/ethereum debate in a serious way until now. The SEC offered these tips to investors considering putting their money into crypto-currencies:

• Ask what your money will be used for and what rights the virtual coin or token provides you.

• Make sure the promoter has a clear business plan you can read and understand.

• Look for a clearly laid-out statement of rights to which the token or coin entitles you, often in a white paper or development road map.

• Ask specifically about how and when you can get your money back in the event you wish to do so. For example, do you have a right to give the token or coin back to the company or to receive a refund? Or can you resell the coin or token? Are there any limitations on your ability to resell the coin or token?

“It is relatively easy for anyone … to create an ICO that looks impressive, even though it might actually be a scam,” the SEC warned.