03 January 2018
SEC Chairman Jay Clayton recently issued a statement about the highly discussed topic of cryptocurrencies and initial coin offerings (ICOs) on December 12, 2017. He addressed main street investors and market professionals, which includes investment advisers and broker-dealers, among others.
Clayton warned market professionals to review SEC investigative reports and subsequent enforcement actions. The conclusion from these documents is that, “…a token can be a security based on the long-standing facts and circumstances test that includes assessing whether investors’ profits are to be derived from the managerial and entrepreneurial efforts of others.”
In a recent enforcement case, Munchee Inc., a California-based company selling digital tokens to investors in order to raise capital for its blockchain-based food review service, was contacted by the SEC and agreed to an order in which the Commission found that its conduct constituted unregistered securities offers and sales.
Any offering, including a token, that emphasizes the potential for profits based on entrepreneurial or managerial efforts of others are the characteristics of a security under U.S. law.
There are cryptocurrencies that do not appear to be securities, but before launching a new product in digital assets, the investor must be able to:
- Demonstrate that the product is NOT a security, OR
- Comply with applicable registration requirements.
Other areas advisers should carefully consider are AML, “know your customer obligations,” Code of Ethics reporting requirements, and proper ADV disclosure (specifically Item 8). There are no AML requirements for investment advisers, but advisers are prohibited from engaging in business with people on known terrorist lists (OFAC).
Do not assume that all cryptocurrencies are NOT securities. Always consider the full characteristics and use of that particular asset and the expectation for profits from entrepreneurial or managerial efforts of others.
We will continue to monitor cryptocurrencies and any SEC news or risk alerts related to cryptocurrency and update you accordingly.
We have been getting a lot of questions about whether or not cryptocurrencies are reportable for personal trading reporting. We suggest advisers require reporting on cryptocurrencies, such as bitcoin, to avoid running afoul of the requirements. Understanding that there will most likely not be brokerage statements, Access Persons can report the required information on a separate form and note if a required element is not applicable.