As it Turns Out, the SEC Doesn’t Completely Hate ICOs

Hours after the Securities and Exchange Commission announced Monday that it had halted a second initial coin offering in less than a week, SEC chair Jay Clayton published a lengthy statement expressing his views on the controversial new fund-raising schemes.

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Among other things, Clayton (that’s him, above) warned investors to be wary of cryptocurrency and ICOs, and urged them to do their due diligence. But he also said not all tokens are necessarily securities, so they may not all fall under the SEC’s jurisdiction. (What the Hell Is an ICO? ← Here’s a primer)

Monday’s cease-and-desist order focused on Munchee, a company whose ICO was supposed raise funds for a blockchain-based food review service. The company had claimed it would use proceeds from its token sale to build a network for itself and other companies to buy goods and services—the tokens were to be payment for review writers, a way for users to make in-app purchases, and a method for restaurants to buy advertising. But the SEC wasn’t having it, saying that Munchee was selling unregistered securities. Munchee and other promoters crossed the line, the regulator said, when they issued statements meant to convince investors that the tokens would increase in value on secondary trading markets.

Clayton explained, for example, that a “token that represents a participation interest in a book-of-the-month club may not implicate our securities laws, and may well be an efficient way for the club’s operators to fund the future acquisition of books and facilitate the distribution of those books to token holders.” But many ICOs are “more analogous to interests in a yet-to-be-built publishing house with the authors, books and distribution networks all to come,” he said. Promoters often lead investors to believe that they can profit from the tokens “based on the efforts of others.” These are “key hallmarks” of a securities offering, Clayton said.