The SEC Recently Issued an Advisory Regarding Coin and Token Exchanges
The Securities and Exchange Commission (SEC) continues to assert its regulatory authority over the cryptocurrency market. The agency recently issued an advisory regarding coin and token exchanges, suggesting that enforcement actions may be forthcoming.
As initial coin offerings (ICOs) become an increasingly popular way for businesses to raise capital, the SEC has made it very clear that it intends to consider all ICOs as security offerings. As we have discussed in greater detail in prior posts, ICOs rely on the same blockchain technology as Bitcoin. In ICOs, investors receive digital coins or tokens, which may be used to access the services offered by the business or resold to others in a secondary market on virtual currency exchanges or other platforms.
In a report issued this summer, the SEC clarified that an offer and sale of blockchain tokens pursuant to an initial coin offering (ICO) may be subject to U.S. securities laws. “Whether a particular investment transaction involves the offer or sale of a security – regardless of the terminology or technology used – will depend on the facts and circumstances, including the economic realities of the transaction,” the SEC advised.
In reaching this conclusion, the SEC applied existing federal securities laws. The agency also made it clear that issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies. If they fail to register, entities participating in unregistered offerings also may be liable for violations of the securities laws. Additionally, securities exchanges providing for trading in these securities must register unless they are exempt.
In recent months, the SEC has continued its warnings to investors and industry participants. In January, SEC Chairmen Jay Clayton and CFTC Chairman Christopher Giancarlo published a commentary piece in the Wall Street Journal, entitled “Regulators Are Looking at Cryptocurrency.” They wrote:
The SEC is devoting a significant portion of its resources to the ICO market. Through statements, reports and enforcement actions the SEC has made it clear that federal securities laws apply regardless of whether the offered security—a purposefully broad and flexible term—is labeled a “coin” or “utility token” rather than a stock, bond or investment contract. Market participants, including lawyers, trading venues and financial services firms, should be aware that we are disturbed by many examples of form being elevated over substance, with form-based arguments depriving investors of mandatory protections.
The SEC has also backed up its position with enforcement actions. Last fall, the agency also created a new Cyber Unit, which is tasked with leveraging the Enforcement Division’s cyber-related expertise on misconduct involving distributed ledger technology and ICOs, among other areas.
SEC Advisory on Coin and Token Exchanges
The SEC’s latest cryptocurrency advisory highlights that online trading platforms have become a popular way for investors to buy and sell digital assets, from ICOs. Many of these platforms bring buyers and sellers together in one place and offer investors access to automated systems that display priced orders, execute trades, and provide transaction data.
The SEC also notes that many platforms provide a mechanism for trading assets that meet the definition of a “security” under the federal securities laws. “If a platform offers trading of digital assets that are securities and operates as an ‘exchange,’ as defined by the federal securities laws, then the platform must register with the SEC as a national securities exchange or be exempt from registration,” the agency advisory states.
The SEC also warns investors that many online trading platforms refer to themselves as “exchanges” and may appear to investors as SEC-registered and regulated marketplaces when they are not.” Its advisory states:
Although some of these platforms claim to use strict standards to pick only high-quality digital assets to trade, the SEC does not review these standards or the digital assets that the platforms select, and the so-called standards should not be equated to the listing standards of national securities exchanges. Likewise, the SEC does not review the trading protocols used by these platforms, which determine how orders interact and execute, and access to a platform’s trading services may not be the same for all users.
With this in mind, the SEC offers the following tips for investors:
Do you trade securities on this platform? If so, is the platform registered as a national securities exchange?
Does the platform operate as an Alternative Trading System (ATS)? If so, is the ATS registered as a broker-dealer and has it filed a Form ATS with the SEC?
Is there information in FINRA’s BrokerCheck ® about any individuals or firms operating the platform?
How does the platform select digital assets for trading?
Who can trade on the platform?
What are the trading protocols?
How are prices set on the platform?
Are platform users treated equally?
What are the platform’s fees?
How does the platform safeguard users’ trading and personally identifying information?
What are the platform’s protections against cybersecurity threats, such as hacking or intrusions?
What other services does the platform provide? Is the platform registered with the SEC for these services?
Does the platform hold users’ assets? If so, how are these assets safeguarded?
For businesses and investors considering an ICO, the SEC’s latest advisory offers further evidence that such offerings must comply with U.S. securities registration requirements. For detailed guidance, it is always advisable to consult with an experienced attorney.
If you have any questions about the SEC’s advisory, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work at 201-806-3364.
Does Your Homeowners Insurance Provide Adequate Coverage?
Your home is likely your greatest asset, which is why it is so important to adequately protect it. Homeowners insurance protects you from the financial costs of unforeseen losses, such as theft, fire, and natural disasters, by helping you rebuild and replace possessions that were lost While the definition of “adequate” coverage depends upon a […]
Understanding the Importance of a Non-Contingent Offer
Making a non-contingent offer can dramatically increase your chances of securing a real estate transaction, particularly in competitive markets like New York City. However, buyers should understand that waiving contingencies, including those related to financing, or appraisals, also comes with significant risks. Determining your best strategy requires careful analysis of the property, the market, and […]
Fred D. Zemel Appointed Chair of Strategic Planning at Scarinci & Hollenbeck, LLC
Business Transactional Attorney Zemel to Spearhead Strategic Initiatives for Continued Growth and Innovation Little Falls, NJ – February 21, 2025 – Scarinci & Hollenbeck, LLC is pleased to announce that Partner Fred D. Zemel has been named Chair of the firm’s Strategic Planning Committee. In this role, Mr. Zemel will lead the committee in identifying, […]
Novation Agreement Process: Step-by-Step Guide for Businesses
Big changes sometimes occur during the life cycle of a contract. Cancelling a contract outright can be bad for your reputation and your bottom line. Businesses need to know how to best address a change in circumstances, while also protecting their legal rights. One option is to transfer the “benefits and the burdens” of a […]
What Is a Trade Secret? Key Elements and Legal Protections Explained
What is a trade secret and why you you protect them? Technology has made trade secret theft even easier and more prevalent. In fact, businesses lose billions of dollars every year due to trade secret theft committed by employees, competitors, and even foreign governments. But what is a trade secret? And how do you protect […]
What Is Title Insurance? Safeguarding Against Title Defects
If you are considering the purchase of a property, you may wonder — what is title insurance, do I need it, and why do I need it? Even seasoned property owners may question if the added expense and extra paperwork is really necessary, especially considering that people and entities insured by title insurance make fewer […]
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Sign up to get the latest from our attorneys!
Explore What Matters Most to You.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
SEC Signals Enforcement Actions Against Coin and Token Exchanges Are Coming
Author: Dan Brecher
The SEC Recently Issued an Advisory Regarding Coin and Token Exchanges
The Securities and Exchange Commission (SEC) continues to assert its regulatory authority over the cryptocurrency market. The agency recently issued an advisory regarding coin and token exchanges, suggesting that enforcement actions may be forthcoming.
As initial coin offerings (ICOs) become an increasingly popular way for businesses to raise capital, the SEC has made it very clear that it intends to consider all ICOs as security offerings. As we have discussed in greater detail in prior posts, ICOs rely on the same blockchain technology as Bitcoin. In ICOs, investors receive digital coins or tokens, which may be used to access the services offered by the business or resold to others in a secondary market on virtual currency exchanges or other platforms.
In a report issued this summer, the SEC clarified that an offer and sale of blockchain tokens pursuant to an initial coin offering (ICO) may be subject to U.S. securities laws. “Whether a particular investment transaction involves the offer or sale of a security – regardless of the terminology or technology used – will depend on the facts and circumstances, including the economic realities of the transaction,” the SEC advised.
In reaching this conclusion, the SEC applied existing federal securities laws. The agency also made it clear that issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies. If they fail to register, entities participating in unregistered offerings also may be liable for violations of the securities laws. Additionally, securities exchanges providing for trading in these securities must register unless they are exempt.
In recent months, the SEC has continued its warnings to investors and industry participants. In January, SEC Chairmen Jay Clayton and CFTC Chairman Christopher Giancarlo published a commentary piece in the Wall Street Journal, entitled “Regulators Are Looking at Cryptocurrency.” They wrote:
The SEC is devoting a significant portion of its resources to the ICO market. Through statements, reports and enforcement actions the SEC has made it clear that federal securities laws apply regardless of whether the offered security—a purposefully broad and flexible term—is labeled a “coin” or “utility token” rather than a stock, bond or investment contract. Market participants, including lawyers, trading venues and financial services firms, should be aware that we are disturbed by many examples of form being elevated over substance, with form-based arguments depriving investors of mandatory protections.
The SEC has also backed up its position with enforcement actions. Last fall, the agency also created a new Cyber Unit, which is tasked with leveraging the Enforcement Division’s cyber-related expertise on misconduct involving distributed ledger technology and ICOs, among other areas.
SEC Advisory on Coin and Token Exchanges
The SEC’s latest cryptocurrency advisory highlights that online trading platforms have become a popular way for investors to buy and sell digital assets, from ICOs. Many of these platforms bring buyers and sellers together in one place and offer investors access to automated systems that display priced orders, execute trades, and provide transaction data.
The SEC also notes that many platforms provide a mechanism for trading assets that meet the definition of a “security” under the federal securities laws. “If a platform offers trading of digital assets that are securities and operates as an ‘exchange,’ as defined by the federal securities laws, then the platform must register with the SEC as a national securities exchange or be exempt from registration,” the agency advisory states.
The SEC also warns investors that many online trading platforms refer to themselves as “exchanges” and may appear to investors as SEC-registered and regulated marketplaces when they are not.” Its advisory states:
Although some of these platforms claim to use strict standards to pick only high-quality digital assets to trade, the SEC does not review these standards or the digital assets that the platforms select, and the so-called standards should not be equated to the listing standards of national securities exchanges. Likewise, the SEC does not review the trading protocols used by these platforms, which determine how orders interact and execute, and access to a platform’s trading services may not be the same for all users.
With this in mind, the SEC offers the following tips for investors:
Do you trade securities on this platform? If so, is the platform registered as a national securities exchange?
Does the platform operate as an Alternative Trading System (ATS)? If so, is the ATS registered as a broker-dealer and has it filed a Form ATS with the SEC?
Is there information in FINRA’s BrokerCheck ® about any individuals or firms operating the platform?
How does the platform select digital assets for trading?
Who can trade on the platform?
What are the trading protocols?
How are prices set on the platform?
Are platform users treated equally?
What are the platform’s fees?
How does the platform safeguard users’ trading and personally identifying information?
What are the platform’s protections against cybersecurity threats, such as hacking or intrusions?
What other services does the platform provide? Is the platform registered with the SEC for these services?
Does the platform hold users’ assets? If so, how are these assets safeguarded?
For businesses and investors considering an ICO, the SEC’s latest advisory offers further evidence that such offerings must comply with U.S. securities registration requirements. For detailed guidance, it is always advisable to consult with an experienced attorney.
If you have any questions about the SEC’s advisory, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work at 201-806-3364.
Let`s get in touch!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!
