While the SEC is refining its understanding and regulation of cryptocurrencies, recipients of SEC subpoenas regarding initial coin offerings (“ICOs”) should remain cautious. We recently wrote about SEC Chairman Jay Clayton’s aggressive statements about ICO regulation and the first wave of subpoenas the SEC sent to companies involved with ICOs. The issue is whether an ICO constitutes the sale of “securities.” The SEC seems to be answering that question in the affirmative, which means companies launching ICOs could be subject to SEC registration requirements and regulations, and companies that have already launched ICOs without registering with regulators may be in the SEC’s crosshairs.
This environment poses risk for everyone involved in ICOs, including the attorneys and professional service firms that support these offerings. For an early stage, boot-strapped company that receives an SEC subpoena, it may be tempting to avoid the cost of hiring lawyers and treat a subpoena as a non-threatening invitation for an informal chat. Both established and emerging companies should resist any such temptation and ignore advice that a call to the SEC can clear up a misunderstanding or get you out of a subpoena response.
Below is a list of best practices for any company that receives an SEC subpoena regarding ICO-related activity.
- Do not ignore the subpoena. It won’t go away. For those who have never dealt with a federal regulator or with the SEC, you might be inclined to think that you can just ignore the subpoena and the problem will go away. It will not. The SEC will not forget about you and there are stiff penalties for failing to comply with the subpoena.
- Hire an attorney right away. It’s worth it. Receipt of a subpoena from the SEC and involvement in an industry-wide investigation are serious matters, and the SEC will expect that you will take it seriously. You should engage outside counsel experienced in government investigations and the securities industry. Unfortunately, a call from you to the SEC pleading your case will not make the subpoena go away and may only make things worse for you or your company. Your attorney will be able to review the subpoena with you, help you assess the SEC’s focus and your risk, and advise you on how to best respond. Your attorney will also communicate with the SEC on your behalf. If responding to the subpoena seems unreasonably burdensome, your attorney may be able to request clarifications or modifications. Relying on attorneys who assisted with the ICO to respond to the subpoena and communicate with the SEC is risky. Those attorneys may themselves be witnesses in the SEC’s investigation, or you may want to assert a defense that is based on reliance on legal advice provided by the attorney who assisted with the ICO, all of which would be complicated by one of those attorneys representing you in response to the SEC.
- Don’t delete anything. The moment you receive a subpoena, or even a reasonable expectation of a subpoena, suspend all of your automatic delete functions and instruct your employees to preserve everything related to the ICO. If your company does not have a document retention policy, now would be a good time to consult with an attorney to develop one.
- Avoid discussing the subpoena. In contrast to your privileged conversations with your attorney, which are protected from disclosure, the SEC can ask you about any of your non-privileged communications regarding the subpoena itself or the subject of the subpoena. Therefore, it is best to minimize non-privileged conversations within and outside your organization. This will also help you control any publicity related to the subpoena.
- Make sure you understand the process. Receipt of a subpoena from the SEC may be just the beginning of the SEC’s investigation. Even after you complete your response to the subpoena, the SEC may issue additional subpoenas, ask questions, seek to interview witnesses, or require sworn testimony from company employees or other related third parties. Because the SEC’s investigation appears to be an industry sweep, the SEC will be talking with other companies, investors, and advisors, as well. Accordingly, even if you think the investigation is over because you have not heard anything from the SEC after completing your response to the subpoena, you may find the SEC knocking at your door again. Hiring counsel experienced in SEC investigations is critical to ensuring that you or your company responds to the SEC in a strategic manner.