Ever since the creation of Bitcoin in the late 2000s, the SEC has warned that, depending on the circumstances, “initial coin offerings” (ICOs) involving digital tokens or coins may be subject to regulation under the federal securities laws. The SEC has provided “facts and circumstances” guidance regarding whether a particular cryptocurrency offering involves a security. See, e.g., the SEC’s Framework for “Investment Contract Analysis of Digital Assets.” But officials have opined that cryptocurrencies sold only to be used to purchase a good or service, such as Bitcoin or Ethereum, may not be securities.
The recent disposition of two SEC enforcement actions—In the Matter of Unikrn, Inc., SEC Administrative Proceeding No. 3-20003, and SEC v. Kik Interactive, No. 19-cv-5244 (S.D.N.Y., filed June 4, 2019)—represent additional milestones in the debate over whether, and when, cryptocurrency offerings implicate the securities laws. In both actions, the SEC alleged the defendant violated Sections 5(a) and (c) of the Securities Act of 1933 by offering and selling securities—i.e. their respective cryptocurrencies—without a registration statement in effect, and without a valid exemption from registration. And, in Kik, the U.S. District Court ultimately agreed with the SEC.
These actions serve as a reminder that the SEC v. Howey investment contract factors should be considered when determining whether an ICO constitutes an offering or sale of securities. However, the unusual expression of dissent by one of the SEC’s Commissioners regarding the Unikrn matter indicates this issue remains controversial and unsettled, particularly since there are relatively few cases that have resulted in published opinions.