The U.S. Securities and Exchange Commission (SEC), an independent regulatory agency whose mandate is to protect investors, maintain an open and fair market and facilitate capital information, tweeted its guide to initial coin offerings (ICOs) on Feb. 10. The announcement was met with mixed reactions as some believe that it came a little too late – more than a year after the ICO boom reached its peak in 2017.
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Why companies consider ICOs?
Long before the advent of the ICO market, venture capital was the only way for startups to raise capital to fund their projects. However, this method is not completely viable because even some promising projects failed to see the light of day because venture capitalists did not believe in their ideas.
At the same time, this kept the business of investing in new startups in the hands of the few, further isolating the poor from having a new piece of the pie of early state investments.
ICOs represent a way of providing every individual with an opportunity to invest in promising ideas and allow new firms to raise capital without going through the scrutiny of venture capital.
Unfortunately, the ICO boom came along with a lot of fraudsters and criminals who attracted the attention of the SEC and other regulatory agencies all over the world.
SEC crashes the ICO party
The SEC partially crashed the ICO party, claiming that it wants to protect investors from scammers and regulate the new market so that it complies with the U.S. federal securities laws.
The agency published five things people need to know about initial coin offerings.
- Some ICOs, based on a number of facts, can be considered to be security offerings, and fall under the jurisdiction of the SEC.
- ICOs that fall under the jurisdiction of the SEC needs to be registered with the regulatory agency or be exempted from registration.
- Tokens, despite being given many names such as utility token or structuring it differently does not prevent them from being securities.
- Some ICOs may be fraud.
- People need to get clear answers before investing in ICOs
How the SEC is shaping the ICO industry
The SEC has in the past come out against a number of ICOs, exchanges, broker-dealers, funds, and even individuals for touting initial coin offerings and slapped them with fines.
The SEC previously ruled that tokens sold to the public with the expectations of returns are securities. Some ICO projects labeled themselves as utility tokens in order to prove that their tokens served another important purpose instead of just being an investment vehicle. The SEC did not have any of it and took enforcement action against these projects.
The ICO industry is being pruned
Analysts and experts in the industry have predicted that the industry will be pruned this year. At the same time, some altcoins will fail along the way while those with real value, commitment, and dedication will survive the purging by the regulatory agency and the bear market. In Part Two we will delve into this in further detail.