Years of regulatory uncertainty have caused ICO projects to flee the US

Abstract: With the development of the encryption industry, ICO has become the target of global regulators, which has led to a sharp decline in such financing.

In any case, ICO (Initial Coin Offerings, the first token issue) has changed the way companies and startups finance. Financing has always been a process of excluding the general public, while ICO allows almost anyone to “invest” by purchasing the project's native digital assets.

However, ICO brings not only funds but also a series of concerns from regulators. Before the blockchain technology, there was nothing like ICO in the world. As a result, this sudden multi-billion dollar ICO boom has allowed regulators like the Securities and Exchange Commission (SEC) to catch up.

As the encryption industry has grown, ICO has become the target of global regulators, which has led to a sharp drop in such financing. Other variants of this crypto financing model, such as the IEO (Initial Exchange Offering), have become a lifeline, although they cannot escape the influence of regulation.

Now, with a series of recent actions against ICO and threatening remarks, the once-defunct SEC seems to be planning to take drastic measures. For example, in June 2019, the Commission announced the prosecution of Canadian company Kik Interactive, allegedly because the company had previously sold unregistered tokens two years ago.

Affected by SEC statements, the number of ICOs has decreased sharply since mid-2018

Diego Zuluaga, a policy analyst at the Cato Institute's Center for Monetary and Financial Alternatives, told LongHash, “The SEC officials have issued a series of statements saying that 'all ICOs are securities' and that the SEC will be on the future ICO After taking enforcement measures, the number of ICOs has dropped sharply since mid-2018."

“Although only a few ICO-related enforcement actions are against allegations of unregistered securities, regulatory uncertainty remains.”

The US SEC's lawsuit against Kik Interactive is quite rare in law enforcement actions against ICO, but there is no precedent.

Encryption supporters have always been cautious about the SEC's increasingly active presence in this space. In 2017, the committee reviewed and reviewed the initial token sales of Ethereum to discuss whether it was a securities issue. Proponents fear that the discussion could be a warning, marking the end of the day when the SEC is on the sidelines. The committee concluded that the Ethereum token sales are not securities issued, but most of the digital tokens belong to securities.

Securities issuance is a long-term financing method that falls directly under the jurisdiction of the SEC. Currently, ICO does not need to register with the SEC before it is released. However, if the SEC believes that an ICO is actually operating in the form of a securities issue, the founder of the project may be in violation of Section 5 of the Securities Act of 1933, as follows:

“All securities issued and sold must be registered with the SEC; or must meet the qualifications for a registration exemption.”

For many projects in the field of encryption, the lack of clear guidelines for securities issuance is a serious risk. Although the project itself may not consider its token product functions to be securities, the SEC may have different opinions and even take legal action.

In fact, in Robert W. Greene's view, ICO is targeting other markets in order to get rid of the strict restrictions of US regulators. Greene is a researcher at the Singapore University of Social Sciences and previously served as the head of the Token Alliance Committee of the Digital Chamber of Commerce.

"The regulatory attitude of the US SEC has undoubtedly pushed projects that want to issue public digital tokens to countries outside the United States," he said. “According to the research report I will release next month, the amount of project financing (US$) registered in the US accounted for more than 10% of the 2017 public digital token issue, compared to only 2% in the third quarter and the fourth quarter of 2018.”

Why the token issue bypasses American participants

According to reports, in the early 2019, a high-profile ICO launched by the popular P2P file sharing application BitTorrent raised $7.1 million in just 15 minutes. However, to purchase an ICO token, the user must verify their identity through KYC. BitTorrent directly prohibits the participation of US users.

The exit of the ICO project from the US market is the current trend. As the SEC's actions in this area become more stringent, many modern token issuance prohibits US residents from participating. According to, in the first quarter of 2019, 86 ICO projects did not accept US investors, making the United States one of the most restricted countries for ICO participation.

Greene explains, “Because it is uncertain whether the SEC will treat a public token sales as an unregistered, illegal public offering, there is a growing desire to sell tokens to a wide range of institutional investors and retail investors. The currency project began to ban the participation of US residents. "This can lead to costly regulatory actions or class actions, even if the token project is conducted outside the United States and the sale is legal in other regions."

To help ensure a credible and reliable project through regulation, the SEC has previously announced that it will publish a framework to allow market participants to more accurately assess whether their ICO projects are governed by securities laws.

Greene pointed out that the SEC released the framework in April 2019, but it did not help to provide regulatory clarity. He cited SEC's Hester Peirce's criticism of the framework, and Peirce said the release of the framework may actually have an adverse effect and "causes an impression that it is a risky matter to pass securities laws in the field." ".

Peirce's comments seem to reflect the mood of the industry. In addition, a study by BitMEX found that the ICO market fell by about 97% in the first quarter of 2019. Even the implementation of IEO may not be the panacea that some people think.

“In the current challenging financing environment, some projects have changed the 'C' of 'ICO' to 'E', presumably hoping this will help fundraising,” the BitMEX report writes. “At least for now, this seems to be effective to some extent, and IEO has raised nearly $40 million so far this year. However, we remain skeptical about the prospects of long-term investors.”

The SEC’s concerns are correct, but eliminating ICO is not a smart move.

Few people in the industry will support the SEC to take a blind eye to the ICO, especially considering that many projects have failed to achieve the promise of investors. However, thorough regulatory pressures may inadvertently inhibit the emergence of reliable quality projects.

Zuluaga of the Cato Institute explained that “the SEC does not understand the subtle differences between token projects, and they want to avoid issuing loopholes to evade securities registration.” The Cato Institute is a US public policy research institution. "This concern is reasonable and important, but the SEC should work hard to provide a way out for encryption projects that really want to launch non-securities."

If there is no room for breathing, the project side would rather leave the United States than try to fight an unfriendly regulatory environment. Zuluaga’s sentiment received a strong response from Greene, who said: “Unfortunately, given the current regulatory attitude of the SEC, it is hoped that the project of digital token sales that allows public participation will be cautious about allowing US residents to participate in token sales. It is understandable."

Greene explained that the blockchain project has other financing options in the US. But unfortunately, sales under STO and D regulations (Regulation D, which are Safe Harbor rules) are usually limited to institutional investors, and these may be in opposition to the democratic ideals of the encryption industry.

Greene's research highlights Singapore's role as an ICO emerging market. In addition, the island nation of Malta has been continually releasing interest in becoming a port of blockchain and encryption crowdfunding innovation.

While some projects may be able to move away from the US to a more friendly regulatory environment, the SEC's attitude may mean that the remaining projects will have to completely abandon their ICO plans.

As Zuluaga explains, “not all token projects have the ability to migrate to another jurisdiction and adapt to foreign regulatory environments.”

Author: Jack Filiba

This article was transferred from: longhash