* Firms sold digital coins assuming SEC rules did not apply
* Recent SEC warnings have rattled law firms, issuers
* ICO issuers now seeking SEC compliance or barring U.S.
By Anna Irrera and Michelle Price
WASHINGTON/NEW YORK, March 21 (Reuters) - Tech start-ups
that issue digital tokens to raise funds are falling in line
with U.S. securities laws or seeking legal ways to skirt them
after the Securities and Exchange Commission (SEC) said it
planned to regulate the market.
The issuers are increasingly filing their 'initial coin
offerings (ICOs)' with the SEC, adding customer checks, barring
U.S. investors or halting fundraising after the regulator said
it will hold most token offerings to the same standards as share
sales, more than a dozen ICO lawyers and executives told
"It's better to pay the cost upfront than to have the SEC
come after you and shut you down," said Armin Ebrahimi, CEO of
Silicon Valley-based ShoCard which is preparing for an ICO in
Until recently, hundreds of start-ups raised billions of
dollars with few investor protections or customer checks. Backed
in many cases by formal legal opinions, those companies believed
that as issuers of "tokens" they did not fall within the SEC's
remit. However, SEC chair Jay Clayton said in February he
believed most digital coins were effectively securities and
should be regulated as such.
The SEC has also launched multiple probes, saying many coin
issuers, their lawyers and advisors may have breached its rules.
Spooked U.S. law firms are now advising digital coin clients
to be much more cautious, according to several lawyers and
"Most credible law firms will not give an opinion that the
token is not a security," said Richard Levin, chair of the
fintech and regulation team at law firm Polsinelli.
No digital coin issuer has yet launched a public offering
akin to a stock exchange listing, but many are now structuring
their deals like traditional private share placements.
North Carolina-based energy settlement platform Causam
eXchange is one of many companies offering tokens under the
SEC's 'Reg D' rule which allows firms to sell securities to
accredited investors subject to know-your-customer checks and a
Causam CEO Joe Forbes told Reuters he had chosen the
structure so as "not to go to jail."
Cryptocurrency firms are also starting to raise money under
the SEC's crowdfunding rules, which allow companies to solicit
funds more broadly subject to a $50 million cap and additional
disclosures, said Nimish Patel, partner at Mitchell Silberberg &
"That's the middle ground that people are going for now."
The value of funds raised globally by digital coin offerings
in January and February fell 43 percent to $726 million compared
with November and December when bitcoin, the best known
cryptocurrency, hit an all-time high just below $20,000,
according to data from research firm Novum Insights.
Silicon Valley-based start-up Stream decided last month to
shelve its planned ICO due to regulatory uncertainty, Simar
Mangat, Stream's chief executive, told Reuters.
"If the SEC were to rule all tokens as securities, it'd be a
huge blow to innovation in the crypto ecosystem here in the
U.S," he added.
Some companies are shunning U.S. investors altogether in
order to avoid U.S. securities law, which generally focuses on
where investors are from rather than where the company is based.
Executives at Estonia-based iOlite, Scotland-based CaskCoin,
UK-based Celsius Network, and Auctus, told Reuters they were
barring U.S. citizens to steer clear of the SEC.
"Auctus will not sell tokens to the residents of the U.S.
due to various regulatory issues," said Daniel Duarte, the
Brazil-based co-founder of Auctus, which is launching its ICO
iOlite believes its token is not a security, but decided to
bar U.S. investors after recent discussions with U.S. legal
counsel, said CEO Alfred Shaffir.
"We prefer to be on the safe side," he added.
Likewise, Celsius will block U.S. persons from its upcoming
token crowdsale, said CEO Alex Mashinsky, adding there was
confusion globally over the United States' position.
"The lawyers themselves don’t know what they are talking
about because things are changing."
Even some U.S-based issuers, such as portfolio platform
CoinSeed, are barring home investors "as a preventative measure
of caution," its documents note.
However, such a disclaimer does not necessarily put
start-ups in the clear. Coin issuers still need to actively
screen-out U.S. persons to fully comply with U.S. law, said Eric
Kintner, partner at law firm Snell & Wilmer.
"Per the SEC guidance, it is doubtful that a simple 'check
the box' would be sufficient to establish that the buyer is not
a U.S.-person," he said in an email.
iOlite, Celsius, ShoCard and Auctus will require investors
to show their passports. iOlite and Celsius told Reuters they
would also be blocking U.S. IP addresses
But not everyone has been so diligent. U.S.-headquartered
transaction laundering detection firm EverCompliant analyzed a
sample of ICOs and found 30 percent asked the registrant to
check a box saying they were not a U.S. citizen, but only 11
percent of these asked buyers to prove this.
And as other jurisdictions start to tighten-up their ICO
rules, focusing on investors outside the United States will
become riskier, said Kintner.
"Companies that seek to avoid U.S. securities laws by only
selling outside the U.S. may be jumping out of the pot and into
(Reporting by Michelle Price and Anna Irrera
Editing by Tomasz Janowski)
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