Initial Coin Offerings Horrify a Former S.E.C. Regulator

The former S.E.C. commissioner Joseph Grundfest in his office at Stanford University. Mr. Grundfest said initial coin offerings represent a “pervasive, open and notorious violation” of federal securities law. Cayce Clifford for The New York Times

SAN FRANCISCO — Members of the Securities and Exchange Commission’s staff have been hearing recently from a former colleague with an urgent question: Why aren’t you cracking down on these initial coin offerings?

Initial coin offerings are a relatively new method that entrepreneurs have used to raise money for start-ups, by selling custom-built virtual currencies. The practice has taken off this year, despite the warnings of regulators and the uncertainty of the rules concerning the fund-raising method.

Joseph Grundfest, who was a commissioner at the S.E.C. in the 1980s and is now a law and business professor at Stanford, said he had been contacting current commission officials and staff to urge them to bring cases, and fast.

“I.C.O.s represent the most pervasive, open and notorious violation of federal securities laws since the Code of Hammurabi,” Mr. Grundfest said in an interview.

“It’s more than the extent of the violation,” he said. “It’s the almost comedic quality of the violation.”

A spokeswoman for the S.E.C. did not respond to a request for comment.

Start-ups have raised more than $3 billion this year from investors through coin offerings. Most start-ups say the coins they are selling will be useful as a method of payment in the online services they are building.

Coin offerings generally happen without the involvement of financial institutions or regulators because investors pay for the coins using Bitcoin and other virtual currencies, which can be sent outside the traditional financial system…

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