In case recent news of the SEC’s apparent industry sweep into initial coin offerings (“ICOs”) was missed by anyone in the industry, on Wednesday SEC Chairman Jay Clayton fired another warning shot when he appeared on FOX Business and warned that many ICOs are securities and that if any company tries to skirt the SEC’s rules, they should think twice because “[w]e are watching. Others are watching.”

Just a week ago, news outlets such as The New York Times and The Wall Street Journal reported that in recent months the SEC has sent subpoenas to dozens of people and companies behind the rise of ICOs. Some reports suggest that as many as 80 companies and individuals in the industry received a subpoena and that SEC offices in multiple cities, including Boston, San Francisco, and New York have been involved. The subpoenas reportedly were sent to companies that have launched ICOs, as well as advisory firms and lawyers who have helped with the sales and include requests for information on how ICO sales and pre-sales are structured and the identities of the investors who bought digital tokens.

The SEC’s recent focus on the initial coin industry is not surprising, although many outside the industry may still be trying to wrap their heads around terms like “initial coin offering” and “blockchain”. In 2017 alone, companies raised over $5 billion through initial coin offerings. Presales for a soon-to-be launched ICO from the messaging company Telegram have been reported at $850 million with two expected additional rounds of sales set to occur over the next few months totaling as much as $850 million per round. The issue from the SEC’s perspective is that it believes most of the ICOs that have been sold should have been registered with regulators as securities, yet few companies have done that.

Chairman Clayton’s television appearance on Wednesday is not the first warning shot fired by the SEC. In July 2017, the SEC issued an investigative report concluding that ICOs may be sales of securities and issued an investor bulletin to advise consumers on the risk associated with ICOs. In September 2017, the SEC announced the creation of a Cyber Unit that would focus on cyber threats and hacking, but also target violations involving blockchain technology and ICOs. On December 11, 2017, Chairman Clayton put out a public statement on his views of the cryptocurrency and ICO markets directed at investors and market professionals. Chairman Clayton noted that at that time no ICOs had been registered with the SEC, but that “the structures of initial coin offerings that I have seen promoted involve the offer and sale of securities and directly implicate the securities registration requirements and other investor protection provisions of our federal securities laws.” He noted that he asked the SEC’s Division of Enforcement to police this area “vigorously” and recommend actions against those who conduct ICOs in violation of the federal securities laws. A few days later, on February 6, 2018, Chairman Clayton testified before the Senate banking committee that he believed many ICOs are being conducted illegally and that the security laws are not being followed by most in the industry.

In addition to the recent sweep on the industry, the SEC has increasingly been targeting allegedly fraudulent ICOs in the last six months. In September 2017, the SEC filed fraud charges against the creator of two ICOs, REcoin and DRC, and froze the creator’s assets alleging that REcoin and DRC misrepresented the total level of investments they had received and made and also alleging that the tokens were not being transacted on blockchains. In December 2017, the SEC’s Cyber Unit filed its first criminal complaint in federal court and obtained an emergency asset freeze to halt an allegedly fraudulent ICO called PlexCoin, run by Dominic Lacroix and his company PlexCorps, which raised up to $15 million from thousands of investors by promising a 1,354 percent profit in less than a month. Finally, at the end of January 2018, the SEC obtained a court order halting an allegedly fraudulent ICO, AriseCoin, that targeted retail investors to fund what it claimed to be the world’s first “decentralized bank” and claimed it had raised $600 million of its $1 billion goal in just two months. The SEC alleged that Dallas-based AriseBank falsely stated that it purchased an FDIC-insured bank, which enabled it to offer customers FDIC-insured accounts and allegedly omitted to disclose the criminal background of key executives.

The SEC’s focus on ICOs only appears to be increasing with the recent industry sweep and Chairman Clayton’s comments. The SEC’s investigations into and actions against ICOs raise novel legal issues in a complex industry. We expect that the ICO industry will continue to be a focus of the SEC and that other companies and persons can expect to hear from the SEC in the near future.