SEC Director Provides Further Insight into Commission's Stern Approach to ICOs

Regulation 2 min, 37 sec READ

by Abhimanyu Krishnan

An SEC Director has highlighted the need for action against fraudulent ICOs and called for a balance between investor protection and innovation.

A Director from the United States Securities and Exchanges Commission (SEC) has indicated that the regulatory body could take a more stern approach to ICOs in the future. 

In a speech on September 20, Stephanie Avakian, Co-Director of the Division of Enforcement, offered some insight into the SEC's focus and concerns in the midst of the current fintech revolution. Offering a disclaimer right at the start that her views were her own, Avakian described the guiding principles of the SEC's decision making policy as,

focusing on the Main Street investor and individual accountability, keeping pace with technological change, imposing sanctions that most effectively further enforcement goals, and constantly assessing the allocation of our resources.

Avakian then discussed ICOs and digital assets in general, first noting that ICO funding has increased exponentially in the past few quarters and that it remains a high-risk activity,

The novelty of ICOs, coupled with excitement about the potential utility of the underlying blockchain, or distributed ledger, technology, makes these offerings particularly enticing for some investors. But the exuberance around the ICO market can obscure the fact that these offerings are often high-risk investments. For instance, the issuers may lack established track records, they may not have viable products, business models, or the capacity for safeguarding digital assets from theft by hackers, and some of the offerings are simply outright frauds.

However, Avakian did also say that the SEC does not want to stifle innovation and that balancing investor protection and innovation is a key factor in all of the committee's decision making. Going over the crypto-related actions that the SEC has undertaken over the last year, including issuing public risk warnings, suspending trading when in doubt and laying charges (as was the case with Centra Tech), she implied that she sees a need for the SEC to act quickly and unequivocally with regards to intentionally bad behavior in the ICO sector.

SEC Aims to Be Firm but Fair

Avakian concluded her discussion of the digital assets market by saying that deliberate fraud deserves the most severe response, but cases of unintended transgression of SEC regulations can be resolved relatively peacefully. She cited a cease and desist order against the Munchee ICO as an example. She also made reference to companies that have misled investors by altering their names to include blockchain in a bid to gain profit from the hype around the technology. 

Aside from Munchee, the Commission has brought other non-fraud cases against individuals who have taken advantage of public interest in blockchain technology with illegal stock sales that violate Section 5. Section 5 cases stress the importance of full and fair disclosure to investors when securities are offered and sold to them.  And, to the extent that the Enforcement Division has other pending investigations in this area, we will likely recommend more substantial remedies against issuers that fail to comply with the registration requirements.

This approach, she hopes, will protect investors from the many scams that continue to proliferate in the ICO market.