SEC Steps Up Efforts to Regulate Virtual Currency Offerings and Exchanges

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 has recently stepped up its enforcement actions against virtual currency exchanges and Initial Coin Offerings that violate federal securities laws.

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, software, or other projects, and that purchasers can expect a return on their investment or participate in a share of the returns provided by the project.

Purchasers are typically able to use fiat currency-i.e., government-backed legal tender-or other forms of virtual currency to buy these virtual tokens.

At the same time, other companies have begun to open "Virtual currency exchanges": platforms enabling investors to exchange virtual funds, including virtual coins or tokens, for fiat or virtual currency.

A security includes "An investment contract," defined by the Supreme Court as "An investment of money in a common enterprise with profits to come solely from the efforts of others." S.E.C. v. Edwards, 540 U.S. 389, 393; 15 U.S.C. 77b-77c. The SEC has determined that virtual tokens frequently meet this definition and are therefore securities within the definition of the Securities Act.

The SEC has stated that virtual currency exchanges may constitute non-exempt exchanges under the Exchange Act.

The SEC's recent spate of enforcement actions against ICOs and virtual currency exchanges demonstrates the application of these interpretations of the securities laws to four such entities.

First, on November 8, 2018, the SEC settled charges it had brought against Zachary Coburn, the founder of EtherDelta, for operating an unregistered virtual currency exchange.

The recent SEC enforcement actions against unregistered ICOs and virtual currency exchanges are great news for the investing public, particularly people without experience in traditional investing, who are more likely to be drawn to unregistered and unsafe virtual currency offerings.

It is critical that the SEC continues to take steps to protect these vulnerable investors from unstable and/or fraudulent virtual currency operations.