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Cryptocurrency and ICOs are So Hot Right Now

Updated: May 1, 2019

Did the title of this blog cause you to have the same Paris Hilton flashback that I had when typing it? Regardless, cryptocurrency is booming—the altcoin (non-Bitcoin cryptocurrencies) market cap has risen from $2.2B to $75B in 2017. Think about that for a second… 35x growth in just 10 months. Such growth has left many people asking what is driving the cryptocurrency phenomenon. There are many thoughts as to why the cryptomarket is growing so rapidly, but one reason is almost assuredly that DJ Khaled is willing to endorse certain cryptocurrencies. Another more well-reasoned belief to explain the rapid growth of the cryptocurrency relates to the impact of Initial Coin Offerings (ICOs for short), which make it insanely easy (possibly too easy) to raise money. In fact, in the last year $2B has been raised through ICOs.

An ICO is the cryptocurrency market’s equivalent of an initial public offering (IPO for short). Much like an IPO, an ICO is a fundraising mechanism used by startups and other groups building a blockchain-based technology. However, IPOs are heavily regulated, require vast amounts of disclosure and are typically conducted by companies with a reasonable level of operational history, whereas ICOs usually only require a “white paper” level of disclosure, are unregulated (to those cryptocurrency legal experts: yes, I recognize this statement is very loaded), and are usually being conducted by groups that may have no operational history. With such a low barrier to entry, ICOs have exploded. No, really, companies have raised hundreds of millions in hours; see Status.IM’s $270M ICO.

Like many other markets that are operating in an unregulated fashion and experiencing explosive growth, the cryptocurrency market recently had a wake up call in the form of a knock at the door by the Securities Exchange Commission. On July 25, 2017, the SEC released a report on the Decentralized Autonomous Organization (an unincorporated organization that allowed crowd-based investment in DAO community projects) and its 2016 ICO, which raised around $150M. The SEC report declared that DAO tokens were securities subject to the 1933 Securities Act; and, by extension, the DAO token sale violated the 1933 Act by selling unregistered securities that did not qualify for exemption.

Piggybacking off of its DAO report, the SEC also released a cryptocurrency investor alert on July 25, 2017, warning the public that ICOs pose an incredible opportunity for those looking to fraudulently bilk investors because they can be conducted so easily and en masse. On September 29, 2017, the SEC announced charges against the ICO promoter who peddled the sale of REcoin’s and Diamond Reserve Club (DRC) Coin’s. The SEC claims that the promoter promised high returns and lied about the amount of money raised by each organization and the parties backing each ICO; even more troubling is that both REcoin and DRC had no company operations.

Yesterday, November 1, 2017, the SEC came after DJ Khaledkind of. The SEC’s November 1st announcement put those involved in ICOs on notice that “[p]ersons making [ICO] endorsements may…be liable for potential violations of the anti-fraud provisions of the federal securities laws, for participating in an unregistered offer and sale of securities, and for acting as unregistered brokers.”

The brass tacks of the SEC's recent actions is that those involved in offering, promoting and advising on ICOs need to be aware that the SEC is watching now, more than ever. In Part 2 of Cryptocurrency Is So Hot Right Now, I'll explain some of the SEC's cryptocurrency oversight concerns.

Are you conducting an ICO? Do you advise ICOs? Do you want to know more about what you need to do to comply with securities laws? Reach out to us.

*This blog provides general information for educational purposes only. It is not intended to constitute specific legal advice and does not create an attorney-client relationship.*

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