Today, the Securities and Exchange Division announced it had halted an Initial Coin Offering (ICO) as an unregulated securities offering.
Clayton warned investors to ask several questions before investing in cryptocurrencies or "initial coin offerings" (ICOs), including "are there substantial risks of theft or loss, including from hacking?" and "is the offering legal?"
While ICOs "can be effective ways for entrepreneurs and others to raise funding... a change in the structure of a securities offering does not change the fundamental point that when a security is being offered, our securities laws must be followed", said Clayton.
In the financial regulator's strongest statement yet, SEC chair Jay Clayton said: "If a promoter guarantees returns, if an opportunity sounds too good to be true, or if you are pressured to act quickly, please exercise extreme caution and be aware of the risk that your investment may be lost".
As governments all over the world are only now starting to address the notorious lack of regulations in the cryptocurrency space, it is refreshing to see that the SEC is taking the matter seriously - and without labelling the entire field as a breeding ground for fraudulent activity, like some leading bankers have done in the past. He emphasized that not a single initial coin offering has registered with the SEC.
His statement echoed an earlier SEC warning in July. The company communicated through its website, a white paper, and other means that it would use the proceeds to create the ecosystem, including eventually paying users in tokens for writing food reviews and selling both advertising to restaurants and "in-app" purchases to app users in exchange for tokens.
Coin offerings often receive investments in the form of cryptocurrency like Bitcoin, which has soared to meteoric heights. Upon contacting Munchee on the second day it sold tokens, the SEC forced Munchee to shut down the offering within hours of notice.
The company told investors that they could expect the tokens to increase in value, and the company said it would help create a secondary market for the tokens, the SEC said. "As the SEC has said in the DAO Report of Investigation, 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", the SEC clarified. The SEC's first direct action against an ICO operator took place in October, but its first case based on securities law alone occurred last week when it obtained an emergency asset freeze to halt trading by PlexCoin. Munchee agreed to withdraw the offering, avoiding a penalty from the Commission.