The Security & Exchange Commission began what was promised in January, a closer scrutiny of companies involved in cryptocurrency, focusing on initial coin offerings (ICOs), The WSJ reported.
The SEC is specifically looking into the sale structure of these offerings, which aren’t necessarily subject to the rules surrounding initial public offerings (IPOs). Due to the lack of regulations, the SEC claims that there’s a history of fraud with token sales. The ICOs are often offered to support startups that have no real products or proven tech.
In October of last year, the SEC investigated a company called REcoin Group Foundation, a company that claimed they were the first cryptocurrency company backed by real estate. The company claimed they had a team of lawyers, professionals, brokers and accountants who were buying up real estate properties, but in reality, there was nobody ever hired; REcoin Group Foundation also reportedly told potential investors that REcoin had already raised between $2 million and $4 million, but the actual amount he had raised was closer to $300,000.
A more recent shady ICO was offered from a group called PlexCorps which was selling securities called PlexCoin. They raised around $15 million from August to December of last year when the SEC obtained an emergency asset freeze and halted the ICO, based on fraudulent profit claims.
ICOs have already raised $1.6 billion in 2018, and now the entire industry is under a microscope. In dozens of subpoenas sent to crypto-issuers since at least January, the SEC have told the companies they should treat their initial coin offering as if they were stocks or bonds, The N.Y Post reported.
SEC Chairman Jay Clayton, is mainly concerned that the ICOs are indeed securities as opposed to utilities. If these offerings are defined as securities, they can be regulated like initial public offerings of stocks.
Those against the regulations claim the ICOs are utilities and the investors are buying units of service instead of actual currency. The investors are purchasing the infrastructure necessary to build the ecosystem of a block chain. To enable such ecosystems to be built some tokens can be “pre-mined” in addition to be sold in “crowd-sales” during tokens launches, according to Balaji S. Srinivasan, a frequent blogger and authority on cryptocurrency.
The SEC has defined ICOs as securities as per Chairman Clayton.
Another area the SEC is looking into is insider trading. They are focused on agreements that allow rich investors to buy tokens ahead of a public sale. These rights can, in turn, be traded or sold for profit before the ICO even occurs. The SEC’s issue here is that these rights are being traded and sold like securities without being subject to any kind of rules. This is very similar to insider trading of IPOs.
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