The sponsor of an initial coin offering agreed to offer full rescission of proceeds raised in order to settle SEC charges that the firm engaged in an unregistered securities offering. The sponsor raised $12.7 Million by issuing digital tokens in exchange for Ether as part of its efforts to raise funds to further develop its internet security product. The tokens would serve as currency for a peer-to-peer network that would allow participants to access additional bandwidth in the event of a cyber-attack. As part of its marketing, principals suggested that the value of the tokens should rise as the network expanded. The SEC maintains that this “reasonable expectation of a future profit” satisfied the Howey test and that, therefore, the tokens were “securities” and the offering constituted an unregistered securities offering. The SEC did not impose a civil penalty because the firm self-reported.
We don’t think that the SEC has a slam-dunk case that ICOs are securities offerings. In fact, some courts have opined that the SEC must specifically prove that each ICO is in fact a securities offering. Until the courts offer some specific guidance, ICO sponsors should observe the securities laws to avoid a crippling enforcement action.