The regulator has issued advice to firms dealing with digital asset securities, including ICO-issuers, investment funds, exchanges, brokers and dealers.
The US Securities and Exchange Commission (SEC) has sounded an alarm over the application of federal securities law to cryptocurrency-related business. In a statement issued on Friday, the regulator warned initial coin offering (ICO)-issuers, investment funds, exchanges, brokers and dealers that their activity, not their technology or branding of the company, is the key when deciding whether those firms come under securities regulation.
The SEC published the advice after making settlementswith AirToken and Paragon Coin ICOs. ICO-issuers must register before starting their offerings so that investors can rely on protection measures and can make an informed decision, the SEC said.
“These two matters [AirToken and Paragon Coin] demonstrate that there is a path to compliance with the federal securities laws going forward, even where issuers have conducted an illegal unregistered offering of digital asset securities,” SEC explained.
Funds investing in cryptocurrencies that are securities must register by following the Investment Company Act of 1940 as its legal provisions apply to all “pooled investment vehicles” although blockchain technology and virtual coins are not mentioned by name in the law, the SEC noted. Individuals who advise on crypto investments come under the scrutiny of the Advisers Act and must file documents with the regulator to follow several requirements including a ban of making misleading statements to investors.
Regarding exchanges, brokers, and dealers, the SEC follows a functional approach to see whether their activity meets the Securities Act definitions. For example, when assessing exchange operators, the Commission taking into account the following analysis:
“The activity that actually occurs between the buyers and sellers—and not the kind of technology or the terminology used by the entity operating or promoting the system—determines whether the system operates as a marketplace and meets the criteria of an exchange under Rule 3b-16(a),” the SEC said.
Brokers and dealers of digital assets securities must register with the SEC and become a member of a self-regulatory organization, the Financial Industry Regulatory Authority (FINRA), the SEC explained.
The Commission’s advice, which was written by the Divisions of Corporation Finance, Investment Management, and Trading and Markets, came nearly two months after a bipartisan group of lawmakers called on SEC chairman Jay Clayton to clearly explain which cryptos are securities. As per US federal law, every security offering that targets US investors must register with the SEC or seek an exemption from the regulator in several cases including the alternative trading system (ATS) regulation for some trading venues.
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