Over the past year, the U.S Securities and Exchange Commission (“SEC”) has increasingly scrutinized initial coin offerings (“ICO”) and certain digital assets. On September 20, 2018, the SEC’s Enforcement Division co-Director, Stephanie Avakian, gave a speech in which she addressed the Division’s approach to dealing with these new forms of tradeable assets. This speech came only days after the SEC settled its first case charging an unregistered broker-dealer for facilitating the sale of digital tokens from several ICOs since the 2017 DAO Report. In her speech, Avakian provided three key insights into the Division’s enforcement strategy.
First, Avakian confirmed previous suggestions that the Division’s guidance on ICOs and digital assets, including cryptocurrencies that may bear the hallmarks of securities, will likely come in the form of enforcement actions and other public statements rather than formal rulemaking. She made no mention of prospective rulemaking in her speech, and instead noted that the Division’s focus was “on bringing cases that deliver broad messages and have an impact beyond the individual cases.” According to Avakian, this approach guides both its decisions on “which matters to open and investigate” and “which cases to ultimately bring.” This is reflective of the Division’s enforcement approach to-date and is in line with the priorities outlined in its 2017 annual report. Thus, businesses and individuals seeking to understand the SEC’s views on digital currencies and ICOs should continue to pay close attention to the Commission’s actions and statements on the topic.
Second, Avakian characterized the Division’s current approach as focused on cases (i) where “technology is merely a veneer for an alleged fraud,” (ii) where “there is a question about the information available to investors about a security,” and (iii) involving unregistered securities offerings through ICOs. With respect to unregistered offering cases, she warned that the Division would “likely recommend more substantial remedies” against new offenders, including those currently under investigation, given the Commission’s recent guidance through settlements.
Third, Avakian stated that the Commission is “looking beyond the issuers of ICOs” as targets for enforcement actions. She cited as examples its recent settlements with TokenLot, an unregistered broker-dealer that sold digital assets, and Crypto Asset Management, a hedge fund manager that engaged in an unregistered non-exempt public offering related to investments in digital assets. That the Cyber Unit will continue to expand its enforcement purview comes as no surprise and is consistent with the Division’s focus on matters related to ICOs and crypto-assets and broad view that most, if not all, digital assets may be securities.