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SEC ICO Probe: Lawyers and Regulators, Beware

Last updated: | 4 min read

Mark Toohey is a lecturer on Digital Currency Regulation at the University of Nicosia (UNIC) with a corporate law background. He is also the Founder and CEO of TBSx3 – a blockchain logistics and supply chain management solutions company.

Lawyers and regulators who are involved in the cryptocurrency sphere are going to be closely watching the U.S. Securities and Exchange Commission’s (SEC) probe into companies who are launching Initial Coin Offerings (ICO).

A tough stance on rogue ICOs is exactly what we should expect, and need, from regulators.

In fact, dodgy operators by now should be feeling nervous as the arm of the law may just be long enough to extend its to reach them.

At the same time, a solid, well-governed business that honestly explains their business to investors, sets out the investment risks (and then uses the funds in the manner described) should have little to fear from regulatory scrutiny. ICOs are an interesting new tool for fundraising.

At the risk of over simplification, ICOs sit between crowdfunding and an IPO. ICOs share some of the traits of each.

Like crowdfunding, ICOs are an opportunity for the general public, the small-scale investors, to fund projects they like. Some see this as a ‘democratisation’ of capital raising.

While ICOs may not need to include all the refinement of an IPO, they certainly should be a strong embodiment of the fundamentals.

Broad Legal Liability

The broad scope of the US legal system means that ICO promoters can fall under the jurisdiction of US law even it they do not have a strong or direct connection to the United States.

The acceptance of investments from US investors or even the use of the US telecommunications system could arguably draw offshore entities under the jurisdiction of US law.

The laws that govern corporate malfeasance exist for very good reasons – having been built up over the decades in response to the bad actions and conspiracies of rogue actors.

These laws are fundamental to a solid, well-governed industry that sustains great new products and services, provides interesting jobs, and gives investors a fair return for making that possible.

Impending sanctions

With the recent crypto-hysteria, I have been stunned to see the rapid emergence of overnight legal experts promoting their insights at conferences and advising clients.

But lawyers around the world should take note that their legal advice, whether it is well considered or not, could have severe implications on the companies that take the advice.

The results will vary depending on the circumstances. It could involve fines, shutdowns, or even jail time where criminal acts are proven in court. Assets could also be confiscated if they are found to be the proceeds of crime.

In this case, legal advisers who gave inadequate or negligent advice are also culpable.

The SEC may well find that some lawyers neither understood the technology nor the legal implications of the paths they advised clients to take (or that they did not strongly advise their clients not to take).

Having been heavily involved in the industry for nearly six years, I know there are a number of lawyers who are experienced and who are dedicated to building and supporting this new industry.

With this probe and perhaps more jurisdictions to follow suit, we will hopefully see a sifting and a reinforcement of those who are focused on supporting and growing this rapidly developing industry.

One thing is for certain – the industry needs lawyers who understand the complexities of the law they are addressing.

Welcoming an international regulatory crackdown

Regulators, by definition, are charged with upholding the law and protecting investors and that is common to every jurisdiction.

An international crackdown of instances of deception, misinformation, incompetence, or even outright fraud should be dealt with.

While some regulators are willing to allow sandbox experimentation, few, if any will tolerate rogue behavior.

I’d much prefer a crackdown on rogue elements and scammers, so good projects get funded instead of the precious investment money pouring down a rat hole.

While regulators in the US have been less flexible than their counterparts in the UK or Europe where there has been a more ‘wait and see’ approach, this harder attitude seems to be thawing with some US regulators expressing an interest in making greater use of regulatory sandboxes.

Sandboxes essentially enable new business models to be tested in a controlled environment under the helpful gaze of regulators and that helps drive innovation.

Positive innovations deserve all the regulatory flexibility and funding they can get.

As reported, about 80 cryptocurrency firms have received subpoenas from the SEC.

Overall, hopefully this ICO probe which is expected to last a year will have a sobering effect that leads to a reform and cleansing of the ICO market.

Investment is a serious activity. People are devoting their hard-earned savings to projects and as investors they have a right to be protected.