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Tech & Sourcing @ Morgan Lewis


Initial coin offerings (ICOs) have become a hot new way to raise funds in 2017, with more than $1 billion raised so far this year. In an ICO, a company or individual creates a new type of digital coin (also known as a “token”) and typically sells the new tokens for more established digital currencies such as bitcoins or Ethereum ethers. The new tokens are the currency used to purchase products or services offered under the particular blockchain project being created (for example, a cloud storage startup could create a new digital currency that can be used to purchase cloud storage from that company). These new tokens also can be traded by speculators, who hope that the value of the tokens will increase.

For the most part, ICOs have been in a regulatory grey area. However, it appears that governments are taking note, with recent announcements from regulators indicating that digital currencies may be regulated as securities.

Notably, last month, the US Securities and Exchange Commission (SEC) issued a report concluding that the sale of tokens in 2016 by The DAO (a “virtual” organization existing on a distributed ledger) violated US federal securities laws. However, the SEC declined to take any action against The DAO. On the same day, the SEC issued an Investor Bulletin on ICOs. The Investor Bulletin does not state that all tokens sold in ICOs will be considered securities. Instead, the SEC takes the position that “facts and circumstances” will determine when tokens sold in an ICO are securities subject to US securities laws.

On August 1, the Monetary Authority of Singapore (MAS) issued a statement on the regulation of ICOs. Like the SEC, the MAS does not state that all tokens will be considered securities. However, the MAS clarifies that if tokens would be considered products regulated under Singapore’s Securities and Futures Act (SFA), then the token issuers must follow SFA regulations, unless an exemption can be found.

More recently, Canadian Securities Administrators on August 24 issued a Staff Notice to help fintech businesses understand when a new digital currency might be considered a security under Canadian securities laws, and where exemptions might apply.

Despite this recent regulatory attention, it appears that ICOs are still popular, with a number of ICOs having been completed in August—and many more on the horizon.