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SEC Warning On Fund Raising Shrugged Off By Digital Currency Start-Ups

SEC Warning On Fund Raising Shrugged Off By Digital Currency Start-Ups
Despite a U.S. regulator's decision that their offerings may be subject to tough securities laws, technology companies looking to raise money by issuing digital coins are moving forward with their plans.
While until this week it was unclear how the U.S. Securities and Exchange Commission would treat the transactions, such initial coin offerings, or ICOs, have allowed startups to raise $1 billion so far this year.
Essentially regulating that tokens issued through the ICOs would fall under laws that require disclosures and are subject to regulatory scrutiny to protect investors, unless a "valid exemption" applies, on Tuesday, the SEC decided that such tokens can be considered securities.
Such a decision would have a chilling effect on the ICO market, some industry participants and analysts had thought. But with more than 120 scheduled to launch this year, according to ICO tracker, 20 new ICOs were announced since the SEC's decision.
They are pushing through with their offerings, said representatives of Rivetz and ICOBox, which plan to launch tokens over the next few weeks.
Contributors typically receive new tokens in return against digital currencies like Bitcoin that they send during an ICO. Those tokens can be traded for other types of tokens after they are listed on cryptocurrency exchanges.
The frenzy surrounding the events has drawn backing from prominent venture capitalists and celebrities even as some ICOs have been criticized for failing to disclose information about underlying businesses and the way tokens are distributed.
How much regulatory scrutiny the upcoming offerings will attract is not clear even with the SEC's warning. ICOs have had limited disclosures and most participants do not get any equity rights, unlike a regular securities offering.
Tokens that would have utility for a specific project is the most likely exemption to the SEC rule that is referred to. Their tokens are just that: "utility tokens," which are necessary to activate their products or accelerate their development, say many tech companies that pursue ICOs.
Their ICOs have a utility said both Rivetz Chief Executive Officer Steven Sprague and ICOBox founder Nick Evdokimov.
Companies looking at ICOs needed to be certain the exemption applied to them, said Charley Cooper, managing director of R3, a consortium of banks looking at using the technology behind digital currencies.
"Anyone is who is contemplating doing an ICO now had better call their general counsel and fully understand securities laws in the U.S. and how they apply in their case," he said.
"This wasn't some vague policy that they floated. This is the division of enforcement of the SEC saying that if you operate in this market you need to follow the regulations."
Questions for digital currency exchanges such as Bittrex that facilitate trading after an ICO are also raised by the SEC ruling.
Llew Claasen, managing director, at venture capital firm Newtown Partners that if they trade tokens considered securities and are based in the United States or have U.S. customers, Crypto-exchanges may be required to register with the SEC.
Because it does not plan to trade securities on its platform, only utility tokens, he sees no need to register his exchange with the SEC, said Bill Shihara, chief executive officer of U.S.-based Bittrex.
"If the facts and circumstances of a token change and lead us to conclude it is a security, we will delist it from the exchange."

Christopher J. Mitchell

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