Initial Coin Offerings Subject To Same Regulatory Safeguards As Regular Securities, SEC Rules

Initial coin offerings, a way of crowdfunding blockchain tech companies, must meet the same regulatory safeguards as traditional securities, the Securities Exchange Commission has ruled.

"The innovative technology behind these virtual transactions does not exempt securities offerings and trading platforms from the regulatory framework designed to protect investors and the integrity of the markets," Stephanie Avakian, the co-director of the SEC's enforcement division, said Tuesday.

In a report outlining the new rules, the SEC singled out an organization called the DAO, which issued virtual tokens last year in an IPO-like process. Hackers stole $60 million of the $150 million in investor money June 2016, exposing the risk of the new currency.

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“We seek to foster innovative and beneficial ways to raise capital, while ensuring — first and foremost — that investors and our markets are protected,” SEC Chairman Jay Clayton said in a statement.

New Rules Ruin Token Party

By mid-July, tech firms raised about $1.1 billion in 89 coin sales this year, roughly 10 times more than that in the whole of 2016, according to data compiled for Reuters by cryptocurrency research firm Smith + Crown. And this year alone, there are 110 upcoming initial coin offerings (ICOs).

"This is a shot across the bow for many of these ICOs," Preston Byrne, a technology attorney who specializes in virtual currencies, told Reuters. "I think it ruins the party in the U.S. for sure."

The DAO was created in April 2016 by a blockchain company called Slock.it.

A blockchain is an online ledger of transactions maintained by a network of computers, which gained prominence as the technology that underpinned digital currencies such as bitcoin.

The DAO was designed as a decentralized crowdfunding model in which anyone could contribute Ethereum tokens, another cryptocurrency, to be a voting member and have an equity stake in the organization.