Late last year, during a talk on cypto currencies and coin offerings, SEC Chairman Jay Clayton made a statement indicating his belief that every ICO he has seen to date is in fact a security. Nearly 2 months later, Clayton also made a public statement indicating that, “to date no ICOs have been registered with the SEC, and the SEC also has not approved for listing and trading any exchange-traded products (such as ETFs) holding cryptocurrencies or other assets related to cryptocurrencies to date”.
When read together, it would appear as though many ICO’s may (despite their best efforts) be dangerously operating as wrongfully exempt from registration, and could fairly easily find themselves soft targets for regulatory actions. And crypto companies are not the only ones that may find themselves such soft targets. In a previous speech (here) Jay Clayton has already issued a warning to gatekeepers such as lawyers and market professionals, voicing his concerns and putting them on high alert. It’s also important to note these statements were made almost immediately following the formation of the SEC’s new “cyber unit” in September of 2017 which (among other initiatives) is tasked with addressing violations and fraud involving coin offerings and distributed ledger technology.
If the above timeline isn’t concerning enough, on March 1st it was reported that SEC had deployed an ICO probe, issuing a number of subpoenas to multiple companies involved with coin offerings. Additionally, the SEC’s halting of fraudulent and unregistered ICO’s has become an almost weekly occurrence. Today, nearly 3 months later, following in the footsteps of the SEC, NASAA (North American Securities Administrators) and state regulators have deployed operation crypto sweep - one of the most coordinated, widespread international crackdowns on ICO’s and crypto-companies aimed at targeting fraudulent offerings. One of the main intentions behind Operation crypto-sweep is to raise investor awareness, as NASAA president Joseph Borg points out, “Not every ICO or cryptocurrency-related investment is fraudulent, but we urge investors to approach any initial coin offering or cryptocurrency-related investment product with extreme caution,”.
As of May 21, roughly 50 respondents across the US and Canada have been targeted and served with cease and desist orders and information demand letters. The alert and full list can be located here. While the list is already fairly lengthy, it is likely to grow, as NASAA president Joseph Borg describes these actions as the “tip of the iceberg”. The full alert also makes note of an existing 30,000 crypto related domain name registrations, indicative of a fast growing pool of future crypto companies and potential fraudulent schemes. In a separate release, the SEC commended the actions of NASAA and offered some valuable resources for investors including materials for spotting ICO scams, and a suggested list of sample questions to ask when considering investments.
For ICO’s and crypto companies seeking D&O insurance with the hopes of insulating themselves from some of this risk we recently published a D&O guide for ICO’s. However companies should be forewarned, while Directors and Officers Insurance is technically (and limitedly) available for companies involved with ICO’s, there are currently no insurers willing to provide coverage for regulatory actions and entity (securities) coverage may also be limited or non-existent. Nevertheless placement of D&O insurance can still serve a critical role in protecting the companies’ balance sheet and protecting the directors & officers’ in the event of insolvency.