A landmark case for ICOs
Businessman Maksim Zaslavskiy is at the centre of the case, which will likely set a precedent for ICOs and how they are treated by the SEC (U.S. Securities and Exchange Commission), the IRS (Inland Revenue Service), and the CFTC (Commodity Futures Trading Commission), respectively.
Zaslavskiy stands accused of violating anti-fraud and registration provisions of federal securities laws after launching two token sales that officials say defrauded investors.
He pled not guilty in December of last year, arguing that the tokens sold during the REcoin and DRCW ICOs, respectively, did not constitute security offerings. He also claimed ignorance of the law as a defence.
However, the DoJ (Department of Justice) and the SEC claim that both token sales passed the ‘Howey test’, meaning that they were in fact securities and should have been registered and regulated as such.
Judge Raymond Dearie didn't rule directly on the question of whether the tokens involved are securities, kicking that question to the trial, which is tentatively set to begin as early as January 2019.
Dearie said: Jury members will decide ‘whether this is a currency or a security’.
A U.S. district court judge announced on Tuesday that a jury will decide whether or not two high profile token sales were in fact selling securities rather than cryptocurrency ‘tokens’ to be used within a ‘working product’.
Despite SEC Chairman Jay Clayton’s famous statement, wherein he declared ‘every ICO I’ve seen is a security’, the general consensus differs somewhat...
Generally speaking, the commonly held view is that if an ICO is selling tokens to be used on a ‘working product’, i.e., a platform that’s already been launched or, at the very least, is well-detailed in a whitepaper and will soon be launched, then an ICO is a legitimate way of raising funds for said project/platform.
This is because, although some investors may flip their tokens for a profit, the tokens do have a real-word use.
Pump and dump?
However, if an ICO organizer is raising funds for a project which is only vaguely outlined and, at the time of the token sale, is not yet in or close to being in operation, then the ‘tokens’ are actually securities.
Additionally, if regulators feel that investors are blatantly investing in a project speculatively in order to sell their tokens for a profit at a later date, this may also cause them to brand an ICO a security.
If this is the case, and an ICO is selling securities rather than cryptocurrency tokens, then these ‘securities’ must be registered with the SEC.
Many ICO organizers are keen to avoid this as registering with the SEC means their respective tokens (read: securities) will be subject to tighter regulations.
Obviously, if this definition (only briefly summarized above) is to be taken as gospel, then there are huge grey areas.
This upcoming case may help to clear things up re ICOs and the way they should be carried out on U.S. soil.