On November 16, the SEC released a statement titled Statement on Digital Asset and Securities Issuance Trading. With the advent of blockchain technology, and the increase in using ICOs as a vehicle for raising capital, the statement provides insight into how the SEC will regulate these new financial innovations.
The 2,800 word statement drives home the following: while blockchain technology resulted in new financial innovations, existing rules and regulations still apply. The statement goes on to list several examples of how existing regulations apply in various scenarios, as illustrated by actions the SEC has recently taken.
Here are some key takeaways:
- Pooled investment vehicles that invest in digital asset securities must comply with the Investment Company Act of 1940. “Investment vehicles that hold digital asset securities and those who advise others about investing in digital asset securities, including managers of investment vehicles, must be mindful of registration, regulatory and fiduciary obligations under the Investment Company Act and the Advisers Act”
- Digital security exchanges must comply with the Exchange Act. The SEC states: “Any entity that provides a marketplace for bringing together buyers and sellers of securities, regardless of the applied technology, must determine whether its activities meet the definition of an exchange under the federal securities laws. Exchange Act Rule 3b-16 provides a functional test to assess whether an entity meets the definition of an exchange under Section 3(a)(1) of the Exchange Act. An entity that meets the definition of an exchange must register with the Commission as a national securities exchange or be exempt from registration, such as by operating as an alternative trading system (“ATS”) in compliance with Regulation ATS.”
- Broker/Dealer rules apply: An entity that facilitates the issuance of digital asset securities in ICOs and secondary trading in digital asset securities may also be acting as a “broker” or “dealer” that is required to register with the Commission and become a member of a self-regulatory organization, typically FINRA.
- It is not too late to correct past mistakes. In the statement the SEC states: “there is a path to compliance with the federal securities laws going forward, even where issuers have conducted an illegal unregistered offering of digital asset securities”/
The full statement is worth reading if you have an interest in learning about how the SEC is viewing these new innovations in raising capital.