The SEC has been very strict regarding crypto ICOs especially because there have been many unregistered token sales that turned out to be scams. While many consider this as regulatory hostility towards cryptocurrency, the multiple acts of fraud caused in the industry give the regulators a solid reason to crack down on cryptocurrencies and ICOs.
In many cases, the reason the SEC penalizes a company is not fraud, rather some other violations like registration, exemption, and disclosure portions of U.S. securities laws. In ICOs, coins are sold as a form of crowdfunding. Instead of voting rights or dividends that come when buying shares of a company, cryptocurrencies often promise access to the network, platform or various services.
While many of these projects are backed by a good team and a potential useable technology platform, some of the projects are backed by nothing. This is one of the various reasons why the SEC keeps cryptocurrencies under their crosshairs. Earlier in June, SEC Chairman Jay Clayton had said that the existing laws won’t be updated just to define this new asset class.
“We are not going to do any violence to the traditional definition of a security that has worked for a long time, […] there’s no need to change the definition.”
Earlier this year, the SEC fined blockchain company Block.one $24 million for conducting an unregistered ICO between June 2017 and July 2018. The SEC’s investigation revealed that the company had raised “several billion dollars” as a part of its ICO that was supposed to be used for development, but the offering wasn’t registered as securities in accordance with the federal securities laws, nor did it qualify for or seek an exemption from the registration requirements, the SEC said.
The most recent victim of SEC’s crackdown is Eran Eyal, the founder of Shopin. Eyal has been accused of conducting a fraudulent ICO that raised more than $42 million in between August 2017 and April 2018.
As per the press release on December 11, Shopin’s ICO was unregistered. Eyal told investors that the funds would be used to create blockchain-based shopper profiles. These profiles would then track customer purchase histories across online retailers and recommend products based on this information. However, a functional platform never came into existence.
Marc P. Berger, Director of the SEC’s New York Regional Office said:
“As alleged in today’s action, the SEC seeks to hold Eyal and Shopin responsible for scamming innocent investors with false claims about relationships and contracts they had secured in support of a blockchain-based universal shopper profile […] Retail investors considering an investment in a digital asset that meets the definition of a security must be afforded the same truthful disclosures as in any traditional securities offering.”
Alongside this, there have been multiple incidents where firms with unregistered ICOs have had to pay heavy penalties. In November 2018, the SEC charged two crypto start-ups named CarrierEQ Inc., also known as Airfox, and Paragon Coin Inc., with violating security registration requirements for their ICOs. It has also blocked many cryptocurrency projects from conducting their ICOs as well.
While many companies have tried to take a stand against SEC, the regulators still stand strong about their notions and don’t take cryptocurrencies lightly. The absence of regulation has often been considered as one of the primary reasons for the massive growth of the crypto industry in recent years, it has also blocked the much needed institutional investment from flowing in. Proper SEC regulation could clean up the crypto space and even make ICOs a viable investment option.