There may a storm brewing for shady companies intent on jumping on the blockchain bandwagon. Startups with no working product seeking to raise millions, or traditional companies rebranding themselves as blockchain connoisseurs are liable to attract the ire of the U.S. Securities and Exchange Commission. In a speech delivered in Washington on Monday, SEC chairman Jay Clayton made it evident that “blockchain squatting” will no longer be tolerated.
Clayton Lays Into Bad Lawyers
The last six months have witnessed a spate of traditional companies adopting the blockchain moniker in a bid to make themselves relevant and to shore up sagging share prices. Sometimes, as in the case of Kodak, those companies have halfheartedly committed to an ICO. And at other times, as in the case of the Long Blockchain Corporation (formerly the Long Island Iced Tea Corp), there’s not even been the slightest attempt to actually do anything with blockchain technology.
In a speech delivered on Monday, SEC chairman Jay Clayton made no bones about the absolute state of the crypto space, opening his remarks by saying:
Market professionals, especially gatekeepers, need to act responsibly and hold themselves to high standards. To be blunt, from what I have seen recently, particularly in the initial coin offering (“ICO”) space, they can do better. Most disturbing to me, there are ICOs where the lawyers involved appear to be, on the one hand, assisting promoters in structuring offerings of products that have many of the key features of a securities offering, but call it an “ICO,” which sounds pretty close to an “IPO.”
Avid ICO investors, who’ve been obliged to scrutinize what passes for white papers these days, will be only too aware of the sort of legal chicanery many of these companies are prone to engaging in. Some ICOs publish their responses to the Howey Test (a means for determining whether certain transactions qualify as “investment contracts”), as if filling in a two-minute questionnaire will substitute for expert legal advice.
That sort of approach doesn’t fool Jay Clayton and his enforcers at the SEC. He continued: “Those [lesser] lawyers claim the products are not securities, and the promoters proceed without compliance with the securities laws, which deprives investors of the substantive and procedural investor protection requirements of our securities laws. Second are ICOs where the lawyers appear to have taken a step back from the key issues – including whether the “coin” is a security and whether the offering qualifies for an exemption from registration – even in circumstances where registration would likely be warranted.”
These lawyers appear to provide the “it depends” equivocal advice, rather than counseling their clients that the product they are promoting likely is a security. Their clients then proceed with the ICO without complying with the securities laws because those clients are willing to take the risk.
It’s a risky business and one that’s destined to end badly for all parties; startups, their lawyers, and investors. The SEC lacks the resources to come after every operation that is flouting securities law, preferring to focus its firepower on the low-hanging fruit: blockchain firms with no product and bold claims about future profits that are designed to artificially inflate their stock price.
“Blockchain for X” companies launching ICOs need to be especially cautious. Jay Clayton believes that many of them have been getting lousy legal advice, and his remarks this week have been interpreted as a stern but well-meaning reminder to get their affairs in order. The next time they hear from the SEC, it may be in less equanimous circumstances…