Jay Clayton on the development of the ICO and the cryptocurrency market

Jay Clayton on the development of the ICO and the cryptocurrency market

The chairman of the Securities and Exchange Commission (SEC) of the USAmade statement about cryptocurrencies and the initial offering of coins

The world financial markets were startled because of the "cryptocurrency fever", which affected virtually all countries. The stories of incredibly rich investors are prevalent in the Internet, and the amount of the acquired cryptocurrency is increasing every day. Negative predictions are not justified, and even the most hardened conservatives begin to conduct ICO and introduce blockchain into their business.

The market is developing so rapidly that many investors are forced to act like blind mice in the dark, making decisions intuitively and trusting third-party analysts. The number of questions towards ICO projects is increasing every day, and the most common of them are:

• Are there laws that protect investors in ICO?

• Is the offering legal?

• What benefits can I obtain as an investor?

• Will my investments be frozen in connection with regulation?

• How high are the risks of theft or hacking of my electronic wallet?

Jay Clayton's statement of December 11, 2017 provides answers to these and other common questions. It reflects the general attitude of the SEC to the market of cryptocurrency and will be useful for:

• small private or individual investors;

• professional market participants, including brokers, lawyers, accountants and investment advisers.

The main recommendations for private investors

In connection with the difficulties associated with the impossibility of thorough regulation of ICO, the level of legislative protection for investors is significantly reduced. The number of manipulations and fraudulent projects is increasing, which is almost impossible to track or investigate.

Investors should remember that to date the SEC has not given permission for admission to trading of any exchange products related to cryptocurrencies and has not registered any ICO. Be careful if the company refers to the opposite, then most likely you are dealing with scammers.

The SEC developed an indicative checklist of questions that will help investors identify fraudsters and assess the likelihood of real fulfillment of the promises of the founders of ICO.

A list of these questions can be found at the end of the article.

As with any other form of investment, if you are promised with too favorable terms, if the payback period is incrediblyshort or you are urged to hurry with the decision, you need to exercise extra caution.

You should also understand that the movement of cryptocurrency investments can not be regulated or tracked. Therefore, investments can move to another jurisdiction without your knowledge, which increases the risk of losing the invested funds.

Recommendations for professional market participants

Along with all fears, Clayton emphasizes that in his opinion ICO can be an effective tool for the development of innovative projects and entrepreneurial start-ups.

Along with the foregoing, any activities related to the issuance and distribution of securities impose certain legal obligations on the founders. Important information about the further development of the project should be disclosed, statistical data must be supported by real sources, and all promises should have a reliable justification.

And although blockchain changes the form of the implementation of the transaction, it does not change the essence of ICO, which, in fact, is in many respects similar to the operations with securities. Blockchain contributed to the fact that investors and startupers could work directly, bypassing corporate state structures. However, investors, unfortunately, are in no way protected by law.

Clayton calls on lawyers and accountants who work with ICO projects to carefully study the case file published in early 2017 (the "21 (a) Report"). Based on the foregoing, it will be possible to analyze further actions to conduct ICO within the legal framework, which will allow to avoid problems with the law. In "21 (a) Report", the Commission applied the multi-year principles of securities legislation to demonstrate that a particular token is an investment contract and therefore is a security under federal securities laws.

According to the SEC, the initial offering of the token is an offering of an investment contract, which in turn is a security, in accordance with applicable US law. In particular, the SEC came to the conclusion that the offering of a token is an investment of money in a common enterprise with a reasonable expectation of profit from the entrepreneurial or management efforts of others.

After the publication of these materials, many founders of ICO tried to issue utility tokens, which are not securities. But nowadays it is nothing more than a game with terms and the utility of a token does not prevent it from being a security.

Tokens, marketing promotion of the value of which is based on the opportunity to  gainprofit from them, will be ranked among tokens possessing features of securities. Clayton calls on professional market participants to pay special attention to the foregoing in order to protect the interests of investors.

Without an appropriate license, the primary offering of tokens with features of securities can be equated with speculation with small profits and other types of fraud. Therefore, all persons working in the field of providing cryptocurrency transactions can get the status of unregistered stock exchanges or brokerage firms, which contradicts the Securities Exchange Act of 1934.

Before launching ICO, it is important for promotersto choose one of 2 ways for further development:

• prove that issued tokens are not securities;

• comply with the legal requirements for trading in securities.

Brokers must strictly follow the "Know Your Client"policy, otherwise their actions may contradict the law on combating money laundering. They should act on the same principles as with regard to cash.

Additional Comments on Cryptocurrency, ICO and Securities Regulation

Cryptocurrency. According to the SEC, cryptocurrencies are elements of independent value, which, like fiat money, can be used to make purchases and carry out financial transactions.

They are a financial instrument, like dollars or euros, but not recognized by the US government.

Adherents of cryptocurrency financial operations determine such advantagesfor themselves:

• the ability to make money transfers, bypassing intermediaries and state borders;

• the finality of the calculations made;

• minimum transaction costs;

• The ability to publicly check transactions without violating anonymity.

Some of the features of the cryptocurrency can contribute to illegal financial activities, which causes distrust on the part of the US government.

Conclusion

The SEC is committed to facilitating the formation of capital. The technology on which cryptocurrencies and ICO are based can turn out to be revolutionary, progressive and increasing efficiency. Clayton is confident that developments in the financial and technological sphere will help ease the formation of capital and provide promising investment opportunities for both institutional investors and small investors.

He calls small or individual investors to be open to these opportunities, but ask the right questions, demand clear answers and at the same time be reasonable. In the process of advising clients, developing products and participating in transactions, market participants and their consultants must carefully consider laws, regulations and recommendations, as well as regulatory principles in the field of securities regulation, which have proven themselves in the face of new developments for more than 80 years. He also encourages market participants and their advisers to work with SEC staff to get assistance in their analysis in accordance with the securities laws.

To obtain legal support in the regulatory aspects of ICO in the USA, contact Law&Trust International.

Examples of questions for investors considering the possibility of investing in cryptocurrencies or ICO

1. Who exactly do I sign an agreement with?
2. Who releases and sponsors the product, what are the initial information about them, and did they provide a complete and comprehensive description of the product? Do they have a clear business plan, which I understand?
3. Who promotes or sells the product, what are the initial information about them, and do they have a license to sell the product? Did they pay for advertising the product?
4. Where is the enterprise located?
5. For which purposes do my money intended and what will they be used for? Will my money be used to "cash out non-cash funds" of others?
6. What specific rights do my investments provide?
7. Are there any financial statements? If yes, are they audited and by whom?
8. Are there any trade data? If yes, is there any way to verify this?
9. How, when and at what price can I sell my investments? For example, can I return a token or a coin back to the company or get a refund / compensation? Can I resell a coin or a token, and if so, are there any restrictions on my ability to resell?
10. If a digital wallet is involved, what happens if I lose the key? Will I have access to my investments?
11. If a blockchain is used, is it open and public? Was the code published and an independent cyber security audit conducted?
12. Was the proposal structured in accordance with the laws on securities, and if not, what consequences would this have for the stability of the enterprise and the value of my investments?
13. What legal protection may or may not be available in the case of fraud, hacking, malware or reduced demand for business prospects? Who will be responsible for the return of my investment if something goes wrong?
14. If I have legal rights, can I effectively enforce them and will you have sufficient funds to compensate if my rights are violated?

The lawyers of Law&Trust International will help you understand the SEC's main requirements for ICO and will develop the best form of tokens to be issued for your business. For more detailed information, please contact us through the application form or by phone on the website.