The looming shadow that the United States federal authorities cast within the vibrant cryptocurrency industry grew marginally darker last week. “By and large, the structures of initial coin offerings that I have seen promoted involve the offer and sale of securities and immediately exceeding the securities registration requirements…”. This remark was printed on December 11 from SEC Chairman Jay Clayton included in a Public Statement on the SEC Website, published simultaneously with In the Matter of MUNCHEE INC.
The SEC’s statement was received with shock one of crypto networking outlets. However, the SEC also shed light on several previously researched questions regarding token sales. Anyone looking to raise funds via a token sale, whatever the utility of the token or the disclaimers in their terms, must pay increased attention to their advertisements and social media use.
Touting your organization’s token as an investment for which you would expect profits may subject that token to U.S. securities enforcement.
1. Will My ICO Even Be Regulated by the US?
The SEC’s order said that the issuer “offered MUN tokens in an overall solicitation that comprised potential investors from the USA.” Notice their use of “possible”. The Cease-And-Desist Order doesn’t say that US Persons were investing, simply that they might have been. Presumably, Munchee could not prove otherwise. This usually means that token issuers seeking to prevent US authority might have to do complete KYC for all buyers. Just working as a foreign thing might not be adequate since foreign entities may drop under US jurisdiction in which their advertisements make its way to US channels. Later on, promoters of nominal sales might have to be particularly cautious regarding US clients.
2. Has the SEC Outlawed All ICOs?
SEC Chairman Clayton’s announcement reflects it’s feasible for ICOs not to qualify as securities and that you will find cryptocurrencies which don’t seem to be securities. Since Ethereum’s token sale predated that the DAO, the SEC might have selected Ethereum for its very first choice. This could have put a halt to all ICOs immediately. The DAO has been a very clear sales share a hedge fund made to share gains. The SEC hadn’t any difficulty deeming it an additional security.
Ever since that time, token issuers went to the premise that should they ordered their dividend as a pure usefulness (e.g. no gain share, just a token to use within an ecosystem) it wouldn’t be a security. The SEC’s Order in the subject of Munchee has shown this assumption incorrect. Issuers of all bona fide utility tokens will need to take different steps to be certain they don’t run afoul of US law, particularly regarding their own messaging.
3. Our ERC 20 Token Is a Utility Token, Are We in the Clear?
First, let us consider the circumstance of current token regulation by the SEC. The SEC’s Investigative Report regarding the DAO Token was a very clear indication of how the SEC intended to govern so-called “investment holdings” If that’s the circumstance, Slock.it supplied DAO Tokens with a gain share directly constructed in, coupled with a voting-based investment platform. The SEC faulted the DAO’s curating and control of their stage, which decreased investor involvement to less than “managerial” participation and passing the Howey Test to qualify as a safety. This meant the DAO Token is an investment contract subject to SEC regulation. On the flip side, the Munchee token is not an investment token with a gain directly attached, but a usefulness investment (with no voting rights) that may be used to facilitate a market of consumer reviews.
In the aftermath of this DAO Report, some commentators advanced the proposal that a usefulness token may fundamentally not be considered a safety by the SEC, a view that is now clearly wrong. It appears to be the case when a utility investment is promoted or touted as a rewarding investment opportunity, purchasing that utility taken could be comparable to entering an investment contract. As such, where the token isn’t an “investment token” using a profit share, if the token was promoted as a profitable investment opportunity it may nevertheless be considered an investment contract.
The SEC put its sights specifically on Munchee for making “public statements or endorsing others’ public statements that touted the opportunity to profit.” They engaged in a top to bottom analysis of Munchee’s messaging that should give pause to all cryptocurrency promoters, out of their whitepaper to their website and all advertisements and social media use.
4. We Have Targeted Crypto Investors Rather Than Utility Users in Our Messaging, Should We Worry?
Promotion of a utility market must aim utility users instead of simply crypto investors. The SEC specifically pointed out that Munchee and its broker led their advertising investors in cryptocurrency instead that users of the Munchee restaurant or app business participants. Regardless of the MUN Token’s utility function, this seemed to the SEC such as MUN was priming expectations of security-like profits. Moving ahead, token promoters should be careful to not specifically market their token sale to investors looking for gains only without curiosity about a token’s usefulness.
5. How Should We Talk About Liquidity, Return on Investment, and Value Increases in Our Messaging?
As small as possible. The SEC believed Munchee’s stated strategy to grow the worth of both MUN, cause admiration, and encourage secondary markets to become important entrepreneurial and managerial attempts producing investors earnings. A picture such as MUN value rises as a portion of Munchee’s financial model has been included to demonstrate how they generated a reasonable expectation of earnings. Promotion of a utility lien ought to be on the usage of that token as opposed to the capability to flip it for a profit in the future.
6. We Want to Retweet an Awesome Youtube Video About Our Token, Is That Ok?
The SEC specifically mentioned in its Order that Munchee had connected to some third-party Youtube video inspection of Munchee’s investment sustainability, commenting “199 percent GAINS on MUN token at ICO price! Subscribe to PRE-SALE NOW!” This was considered a part of producing a realistic expectation of gains in the investor at the SEC’s Howey Evaluation of Munchee. Promoters of nominal sales have to be very cautious when selecting to retweet or adopt different statements in social networking since they might reflect the kind of realizing which was depended upon in this circumstance.
Moving forward, it appears that even promoters of utility classifieds earnings have their work cut out for them. They may want to KYC all their customers to root out taxpayers. They need to carefully examine every element of their messaging, from whitepaper to Facebook account. They must think about who is being targeted from the messaging, talk of almost any profitability or token appreciation, and whether utility or gains is being emphasized. Promoters of nominal sales must not tout their investment as a profitable investment opportunity.
This implies many token sales might have to make a radical change to their advertising strategy and perhaps their business model to be able not to run afoul of the SEC. Obviously, participants in the cryptocurrency industry must recall that the Howey Test is based upon a case-by-case evaluation, and no 1 factor is dispositive in determining whether or not a token is a security. Token promoters need to be careful to get expert analysis and guidance when determining how to proceed with a sale that may be controlled by the US federal government.