Since 2016, ICOs have grown exponentially. 2018 witnessed a rise in ICO offerings to the tune of over USD 11.4 billion USD and over USD 360 million this year till now.
Companies around the globe are increasingly embracing ICOs for fundraising. In response, regulatory bodies like the Securities and Exchange Commission (SEC) are working diligently to regulate ICOs.
Predominately, the idea behind regulating ICOs is to control fraud, prevent market manipulation and protect the investors. ICOs indubitably serve as a great solution to fundraising, but the scams related to them also cannot be overlooked.
Before you seek benefit of ICO development services to embark on your ICO development journey, understanding how the SEC views ICOs and various applications will help you navigate in the right direction.
Understanding the Role of the SEC
In order to understand the role of the SEC, it is crucial to comprehend its core functionality. Securities and Exchange Commission was formed by the United States Congress in 1934 as a response to the stock market crash in 1929. The aim was to prevent companies from sharing false or misleading information with investors, like manipulating reports about their performance or future potential. Since then, the SEC has been responsible for regulating the securities market.
The main role of the SEC is to verify the statements from companies and preventing institutions — like exchanges, brokers and dealers — from any unfair practice or scam.
Now, it is important to understand what the SEC is seeking. It begins with the Howey Test.
SEC Regulations: What is the Howey Test?
It is important to find out whether a coin or a token is considered security in order to determine which, if any, regulations apply. The treatment of utility tokens still needs clarity but the security tokens are directly linked to a company’s growth. This makes security tokens similar to stocks and they fall within the SEC purview to regulate the ICO.
The SEC uses the Howey Test to decide whether or not an ICO is a security token. The four conditions that need to be considered include:
- Money is invested
- Investors expect a profit
- The monetary investment was in a common enterprise
- Profits come from the efforts made by a third-party or promoter
If these four conditions apply, the token is deemed security and is subject to the SEC regulations.
Currently, the majority cryptocurrencies qualify as securities. Simply stating or wishing that a token does not satisfy the aforementioned conditions would not suffice. It needs to be proven based on the functioning of the token and the actual investment procedure.
SEC Regulations on ICO
Although some experienced companies delivering ICO development services can guide you on SEC regulations on ICO, gaining an in-depth understanding of the same yourself will help you in right decision-making.
When a token is considered security, it is subject to the same regulations as other securities.
The SEC regulations driving the ICOs are same as the regulations for stocks and bonds. No separate regulations are imposed on ICOs that qualify as securities. In addition, the SEC also applies securities laws to cryptocurrency exchange platforms and digital wallets.
One of the requirements is to register with the SEC unless you satisfy the conditions to be exempted. Once you register with the SEC, you will have to provide certain business and finance related information. This ensures that the investors have true information about your business and it helps prevent the spread of misleading information.
Not all cryptocurrencies qualify as securities. Coins like Bitcoin and Ethereum are not considered securities and are not subject to SEC regulations as they are viewed as commodities than securities. Similarly, utility tokens are not considered securities as they are not seen as investments.
Thus, before you actually start looking for ICO development services, equip yourself with complete information of the SEC regulations and Howey Test to find out whether your token is security or not. If it is not, there won’t be many formalities, but if it is, you would surely not want to miss out on anything that comes from the SEC.
At Antier, we offer comprehensive services — from ideation, token creation, white paper creation to token development, launch, and marketing — to navigate your ICO journey. Our expertise lies in creating tokens on different Ethereum standards as per your business needs. Be it ICO for real estate, retail, finance or any other venture, our Blockchain experts have you covered.