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  • Writer's pictureIan Ippolito

SEC Fires Warning Shot at Bitcoin ICOs (Initial Coin Offerings)

Updated: Sep 20, 2023

Unregistered investments put on notice that they're breaking the law, and can expect vigorous policing and enforcement

SEC Fires Warning Shot at Bitcoin ICOs (Initial Coin Offerings)

2018-02-01: Cyber currency exchange Bitfenex is accused of artificially propping up the price of bitcoin. It was first subpoenaed by US commodities regulator, and then fired the auditor it had originally hired to exonerate it. "There is a problem here," said Jill Carlson, a former trader at Goldman Sachs consults with a variety of virtual currency companies. "The dissolution of the relationship between monitor and accompany is very rarely a good sign that the company is behaving in accordance with market best practices"." "It could mean that a lot of the rally over December and January might not have been real". said Joey Krug, the co-chief investment officer at Pantera capital which runs several virtual currency hedge funds. (More...) 2018-01-25: Update: SEC chairman, Jay Layton, fired two more "stern" warning shots at attorneys involved with ICOs. Specifically he put on notice attorneys who "claim that ICOs are not securities", and attorneys who "appear to provide the 'it depends' equivocal advice, rather than counseling their clients that the product they are promoting likely is a security". And warned that the SEC will be on "high alert" for this sort of activity, which is "contrary to the spirit of our securities laws and the professional obligations of the U.S. securities bar." (More...) And in other news, Ernst & Young found that crypto-currency exchanges experienced a staggering $2 billion in losses due to hacking and other security flaws/issues. These losses were non-reversible, due to the permanent nature of blockchain tech. In addition, other security issues with cyber currencies caused more than $400 million to be stolen directly from owners via phishing attacks, etc. In comparison, the average bank hack was $1.5 million and resulted in no loss of money to the consumer. (More...) (Disclaimer: I'm an investor and not a financial advisor or attorney. Consult your own financial and/or legal advisors before making any investment or legal decisions.)

"I'm dreaming of an ICO Christmas"…

You can't go to a cocktail party or meeting of investors without the topic of bitcoin ICOs coming up. Eyes gleam from the excitement of the imagined riches that many believe are there for anyone and everyone to grab.

"Don't bother me with the pesky details"

Few actually understand the considerable security, technical and economic limitations plaguing bitcoin and other cyber securities. And even fewer understand that the ICO they're bragging about, didn't give them any ownership of the company they believe they're going to ride to the moon with.

Bitcoin ICO investors are essentially buying "funny money" which can only be spent in a service or product that doesn't exist yet, but the company promises to make in the future. If the company does, then the coins can be spent there. If they don't (and most groundbreaking software projects fail) the coins become worthless.

In any other time and place, most people would assign a value close to zero to many of these tokens. But these aren't ordinary times. In a historically low interest rate environment, investors are starved for yield, and chasing any return they can find. And in this case, the tokens have a secondary use. Before they actually fulfill (or fail) at their primary purpose, they can be traded on a secondary market. And the prices on the secondary market have been going up and up for the last year. (Although not with some scary roller coaster drops as well).

ICO's for President in 2020?

Some believe that bitcoin ICO's will become the next major wealth creation engine of the economy. Ordinary people are maxing out credit cards, taking out second mortgages, and leveraging themselves to the hilt to buy bitcoin. Many talk about how everyone should be investing up to 10% of their net worth in these investments.

In my opinion, the signs of a huge bubble are written all over most of these. The breathless hype, belief that prices cannot fall significantly and the leveraged purchasing by novice investors is exactly like 2006 before the housing bubble crash and 2000 before the .com bubble crash.

And more importantly, the value of ICO's are completely divorced from the actual underlying values of the assets (which is pretty close to zero). The only thing sustaining the ever increasing prices is the momentum: all the hype and excitement means that the next person is willing to pay more for it than the first person.

This is sometimes called a "greater fool" dynamic, and people can make fortunes from the momentum. The problem is that there are only so many people willing to buy, and eventually it has to end. When it does, the bubble collapses and lots of people lose lots of money.

And the other problem is that there's no way to time a bubble and know when it's time to get out of Dodge. Just the opposite: the continuing success playing the momentum earlier in the bubble, makes it most likely that the investor will be too heavily invested when they run out of time.

"What, me register?"

At least the 2001 .com crash occurred on registered, regulated investments in the stock market, that have considerable protections for investors. Many of these ICO's have claimed that they are not securities, and so they have not registered with the SEC. This saves them considerable money, and also allows them to bypass many of the rules designed to protect investors (such as full disclosure of all the risks). And there have been well documented reports of trading fraud in secondary markets (like pump and dump schemes), that ripoff investors and that would not be allowed in a registered market.

SEC is ending the party

However, a few days ago, Jay Clayton, head of the SEC said things are about to change.

First he amazingly actually warned ICO investors that many are probably committing the most-famous 4 word mistake in investing:

"The world’s social media platforms and financial markets are abuzz about cryptocurrencies and “initial coin offerings” (ICOs). There are tales of fortunes made and dreamed to be made. We are hearing the familiar refrain, “this time is different.”

Then he explained what makes something a security:

"These offerings can take many different forms, and the rights and interests a coin is purported to provide the holder can vary widely. A key question for all ICO market participants: “Is the coin or token a security?”

As securities law practitioners know well, the answer depends on the facts. For example, a token that represents a participation interest in a book-of-the-month club may not implicate our securities laws, and may well be an efficient way for the club’s operators to fund the future acquisition of books and facilitate the distribution of those books to token holders.

In contrast, many token offerings appear to have gone beyond this construct and are more analogous to interests in a yet-to-be-built publishing house with the authors, books and distribution networks all to come.

It is especially troubling when the promoters of these offerings emphasize the secondary market trading potential of these tokens. Prospective purchasers are being sold on the potential for tokens to increase in value – with the ability to lock in those increases by reselling the tokens on a secondary market – or to otherwise profit from the tokens based on the efforts of others. These are key hallmarks of a security and a securities offering."

To remove doubt he explicitly said that most ICO's are securities:

"By and large, the structures of initial coin offerings that I have seen promoted involve the offer and sale of securities and directly implicate the securities registration requirements and other investor protection provisions of our federal securities laws. Generally speaking, these laws provide that investors deserve to know what they are investing in and the relevant risks involved."

And finally, like a sheriff from a Western, he warned ICO's that the SEC will be after them if they don't register and comply with the law.

"I have asked the SEC’s Division of Enforcement to continue to police this area vigorously and recommend enforcement actions against those that conduct initial coin offerings in violation of the federal securities laws. "

He also added numerous things for people to watch out for (including trading markets with unfair pump and dump schemes, substantial risk of theft from hacking, etc.).

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About Ian Ippolito
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Ian Ippolito is an investor and serial entrepreneur. He has been interviewed by the Wall Street Journal, Business Week, Forbes, TIME, Fast Company, TechCrunch, CBS News, FOX News, USA Today, Bloomberg News,, CoStar News, Curbed and more.


Ian was impressed by the potential of real estate crowdfunding, but frustrated by the lack of quality site reviews and investment analysis. He created The Real Estate Crowdfunding Review to fill that gap.

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