SEC Invokes Duck Test for Initial Coin Offerings-ICO Alert

November 11, 2017

The Duck Test : If it looks like a duck, walks like a duck and quacks like a duck, SEC Chairman Jay Clayton said so-called initial coin offerings aka ICOs in many cases are a duck within the context of securities offerings and SEC rules governing ICOs are likely to become hard-coded. On Thursday, the top US securities top regulator fired a warning shot against the bow of bitcoin and cryptocurrency-based businesses seeking to raise money via crytpocoin and token offerings, they suggested the US SEC could shoot first and ask questions later if investor offerings do not conform to rules for private placement memorandum offerings and established accredited investor guidelines.

As reported by the Wall Street Journal, “I have yet to see an ICO that doesn’t have a sufficient number of hallmarks of a security,” Mr. Clayton said in an unscripted remark delivered in the middle of a speech at the Institute on Securities Regulation in New York Wednesday

SEC Commissioner Jay Clayton Photo: Andrew Harrer/Bloomberg News

In a brief interview after his speech, Mr. Clayton said many ICOs resemble traditional stock offerings, with the only difference being the new fundraising tool involves tokens and distributed-ledger technology. “When you depart from the bitcoin or the ethereum, and you get into the tokens, the hallmarks become pretty clear,” he said.

The Duck Test For Dummies here

Mr. Clayton’s remarks suggest firms using the coin offerings, also known as ICOs, to raise cash in the U.S. may need to register the deals with the SEC and provide investors with extensive disclosure documents, depending on how broadly they market them. Startups that once conducted virtually unregulated token sales will likely have to consult lawyers and other gatekeepers to advise them on how to navigate laws and rules overseen by the SEC.

An initial coin offering is a method of capital raising among cryptocurrency-related startups that has exploded in popularity this year. In an ICO, firms simply create and offer a new token to investors. The process can be as simple as adding a few lines of code to an existing project.

Whether your company is a fintech startup, or simply planning a private placement offering available to a select universe of friends and family, seeking to raise capital from qualified investors or accredited investors via a Initial Coin Offering (ICO), an initial public offering (IPO) via an exchange listing, a properly prepared offering prospectus or offering memorandum is required by your investors and industry regulators that govern securities offerings. Issuers seeking affordable investor document solutions rely on experts at


But as the dollar totals have risen, the questions among regulators have risen as well. Chinese authorities in September declared initial coin offerings illegal. Hong Kong regulators warned the offerings are likely to be regulated. The U.K.’s Financial Conduct Authority said token offerings have parallels with initial public offerings and other fundraising methods, and may fall into its “regulatory perimeter.”

In July, the SEC issued a high-profile investigative report on coin offerings, concluding that some of them may meet the definition of a security, but that it would look at each on an individual basis. The focus of the report was a 2016 offering called The DAO. The commission concluded the DAO tokens were a security, but it declined to take enforcement action against the sponsors, opting instead to provide guidance on how ICO users should deal with investor protections written into securities laws.

In the wake of that report, a number of firms tried to calibrate their initial coin offerings to a form they assumed would keep them clear of the securities designation. Mr. Clayton’s comments suggest they could still be within the SEC’s ambit if they raise funds within the U.S.

The full story at WSJ via this link

SEC Invokes Duck Test for Initial Coin Offerings-ICO Alert