Founded by US Congress in 1934, the SEC is primarily charged with making sure that statements filed by corporate entities comply with respective regulations and that issuers of securities do not breach the rights of investors..
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How Does the SEC Define a Security?
The SEC relies on a special test (referred to as the Howey Test) for identification of different types of securities. To be recognized as a security, it is to meet 4 specific criteria, namely:
- To qualify as a monetary investment
- To ensure reasonable level of dividend
- To make sure that funds get invested in a regular enterprise
- To ensure that proceeds result from the efforts of promoters or 3rd parties
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Requirements Placed on Securities
Irrespective of the type of their securities, security issuers are required to apply for registration with the SEC. In addition to that, they are expected to make available the following information:
- What property their commercial entity has and what line of business they are in
- What kind of security they are offering
- Who is in charge of their commercial entity
- What earnings reports verified by trustworthy auditors they have filed over the recent years
Providing the above information will enable investors to have a more accurate idea about the type of investment they about to undertake and make an informed choice.
If a security issuer does not apply for registration in a manner prescribed by respective regulations and fail to abide by the requirements placed on securities, they may face legal repercussions.
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SEC vs ICO Issuers
As per current US legislation, an ICO of nearly any type can be qualified as a security offering. It has come as a major surprise, though, that the SEC has subpoenaed a large number of ICO issuers recently.
The rationale offered for such a move has been that they might have been engaged in token-related transactions that were not in compliance with respective federal regulations.
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To avoid any problems with the SEC, ICO issuers are, therefore, strongly advised against selling their tokens to investors without accreditation and avoid breaching federal laws regulating issuance of ICOs.
Other possible solutions include repurchasing already issued securities and refunding their cost (including interest), subtracting certain tokens from an issuer’s balance without adding them anywhere, forking tokens, and submitting reports to the SEC in a timely manner.
It is hard to see what legal repercussions of the SEC-issued subpoenas will be. Media reports suggest that US legislators have been discussing the situation with representatives of the industry to get a better idea of what their primary concerns are. Regulators, in their turn, are voicing concerns that cryptoassets may be used as a money-laundering tool and a way to fund terrorism.
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Whatever the outcome of the situation with SEC-issued subpoenas will be, experts are cautiously optimistic about the chances of adapting existing legislation to accommodate cryptoassets. In the short-term perspective, issuers of ICOs are advised to maintain close contact with the SEC to ‘finetune’ current regulations. In the long-term perspective, ICO issuers can collaborate with the SEC to come up with new procedure for registering, trading and reporting cryptoassets..
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