Hundreds of startups that did token sales are finding out they’re in violation of securities law— including many that were sure they did it the right way.
During the past few months, the Securities and Exchange Commission has significantly widened its crackdown on certain initial coin offerings, putting hundreds of cryptocurrency startups at risk.
The SEC sent out a slew of initial information-seeking subpoenas at the start of 2018. Now the agency has returned to many of those companies, and subpoenaed many more—focusing on those that failed to properly ensure they sold their token exclusively to accredited investors.
The agency is exerting pressure on many of those companies to settle their cases. In response, dozens of companies have quietly agreed to refund investor money and pay a fine. But many startups that have been subpoenaed say they are left in the dark struggling to satisfy the SEC’s demands, and are uncertain of how others are handling it, according to conversations with more than 15 industry sources as part of a joint investigation by Yahoo Finance and Decrypt.
The sources, many of whom are employees of companies that were subpoenaed by the SEC or are attorneys for those companies, requested anonymity, because the SEC restricts them from discussing the matter.
ICO funding, which began in 2014, exploded in popularity last year as an alternative method to fund a cryptocurrency startup, rather than the traditional venture capital route. In an ICO, a startup sells its own digital token, typically for later use in the ecosystem the startup plans to build; buyers pay for the token in the cryptocurrencies bitcoin or ether. In the majority of cases, companies that do ICOs have not yet launched any product. Think of an ICO as buying chips for use in a casino that hasn’t been built yet.
It is hard to say precisely how many ICOs occurred during the past four years. ICO Alert says it has tracked more than 5,000 but publicly displays only 3,400 “legitimate” ones. CoinDesk, a leading bitcoin trade publication, lists only 800 in the past two years. More than $20 billion has been raised in ICOs to date, but the ICO boom peaked in January 2018. Concerns over the legality of token sales have had a chilling effect.
The core issue now for every company that did an ICO: Was its “token” a security? And if it was, did the company register its offering with the SEC, or ensure that it qualified for an exemption?