Guest post by Matthew LaGarde from Katz, Marshall & Banks, LLP
Matthew is the Associate of Katz, Marshall & Banks, LLP.
The US Securities and Exchange Commission (“SEC”) has recently stepped up its enforcement actions against virtual currency exchanges and Initial Coin Offerings (“ICOs”) that violate federal securities laws.
Due to the highly technical nature of virtual currency and its underlying technology, the area long operated as a sort of financial Wild West, with consumers and unskilled investors falling prey to overly risky investments and outright frauds. Since November 2018, however, the SEC has issued at least four virtual currency-related enforcement actions and put the industry on notice that it will be monitoring its actions.
What are Virtual Currencies, ICOs and Blockchains?
Understanding the relationship between virtual currency exchanges, ICOs, and federal securities laws, at even a basic level, requires an understanding of certain underlying terminology. The SEC has provided a useful primer.
As the Commission explains, ICOs rely on “virtual currency,” which companies create and disseminate using “blockchain” technology.
“A blockchain is an electronic distributed ledger or list of entries—much like a stock ledger—that is maintained by various participants in a network of computers.”
The most well-known example of blockchain technology is the Bitcoin blockchain; however, hundreds of public blockchains exist. Blockchains use cryptography to process and verify virtual currency transactions on their ledgers. A virtual currency is a digital representation of value that companies and investors can buy and sell.
Raising Capital with Virtual Currency
Recently, some companies have begun using virtual currency—typically referred to as virtual “coins” or “tokens” – to raise capital. As the SEC explains in its Investor Bulletin, promoters of these virtual tokens frequently tell purchasers that the capital raised from the sales of these virtual tokens will be used to fund the development of a digital platform,