It has hardly been a year since Initial Coin Offerings (ICOs) became a thing, but the SEC has already intervened in a manner that leaves much to be desired.
Instead of opening a public consultation on ICOs, the SEC has decided to engage in the task of interpreting the law through an “investigatory report” publicly released, which their enforcement division has generalized as applying to all ICOs:
Some may consider that to be a constitutional breach of the separation of powers as SEC’s job is to be the executive arm and enforce the law, rather than interpret it. A task that rightfully belongs solely to independent judges in a court of law, who reach a decision after hearing arguments from both sides.
As such, whether their conclusion is right or wrong only a court can say, but the way they have gone about it suggests an ideological streak that dislikes blockchain innovation and insists old laws must be applied to new things.
Instead of holding a public consultation on the matter. Rather than analyzing the variety of functions ICO tokens can have. They have taken one example and then in the tweet have generalized it to all others.
At the same time, they provide no nuance whatever, no guidelines, nor exceptions. A billion dollars ICO is to be treated the same as a million dollars ICO, according to that tweet.
A tweet based on the SEC’s interpretation of the facts and law in just one case. Facts which at times are incorrect with Alex Van De Sande, an Ethereum developer, stating:
“The report does contains multiple factual errors: it said the curators could prevent votes to be replaced—they couldn’t.”
It further compares DAO token holders to corporate shareholders when the latter only has an IOU while token holders had direct control over the assets.
That’s why we don’t have the executive, necessarily biased towards increasing their bureaucracy for more funding, interpret the law or facts. And that’s why in a well functioning democracy, policy decisions are made after public debate rather than by issuing “investigatory reports” that were probably carried through little else but a few hours of googling.
An “investigation” which contains no interviews with the relevant parties, no expert input on the technicalities, no consideration of who actually holds and controls the eth and the tokens, nor any discussion of how that may be very different from stock shares where the fiat is given to a managerial class.
Moreover the “investigation” does not consider any policy matters which most legislation contains and any court of law would so consider implicitly or explicitly.
Policy matters such as, can the DAO be considered a co-operative, and if it is, are the co-operative participants who bundle their funds issuing securities? If someone organizes the inception of the co-operative and brings to life this pooling of funds, with the co-operative participants then fully in charge, can it really be said that the initial organizer, to whom the token holders might not even give a dime, is instrumental to its success?
But the SEC does not appear interested in any of the innovatory aspects or the significant differences between traditional securities and DAO like tokens. If they were, they would not issue an “investigatory report” and lay down the law as if they are Congress. They would have instead opened a consultation and engaged with experts to better understand the nature of ICOs, their very different kinds, and so on.
That they did not do does suggest there is an ideological streak at the SEC driving these decisions. That is strengthened by their slap in the face of this space when they waited until literally the last minute to deny the Bitcoin ETF some 4 years after its initial application.
If they expect any start-up to wait 4 years before they can get innovative projects like the DAO off the ground, then they should consider whether the SEC lives in a detached reality of lawyers.
Because the most likely outcome is an exodus to jurisdictions that understand nuance and actually make the effort of engaging this space rather than laying down the law as if they are Moses.
That all said, fair disclosure, quarterly reports, and much of the rest, is reasonable and even desirable, with far more stringent requirements on start-ups that try to raise hundreds of millions and potentially none, or very little, on those that raise $1-$10 million.
But the way the SEC has gone about making their decision has now created significant confusion which means projects will probably simply try and block US citizens from participating.
It, moreover, re-enforces the impression that American regulators are very unfriendly towards this space, with their double taxation of digital currencies continuing.
As such, they may have opened the way for London to take the banner and engage in a more reasonable as well balanced approach towards protecting the public while encouraging innovation.