SEC Issues Detailed Statement on Tokenized Securities
The SEC has issued a statement regarding the emerging class of “digital asset securities.” In it, the SEC is open to allowing blockchain technology to naturally develop and add to the richness of the market but warns security token issuers to stay within the bounds of existing regulations.
When the SEC publically comments on something, you know they have their eye closely watching it.
Recently, the SEC decided to put out a statement regarding the growing class of tokenized securities. In the statement, they affirm blockchain’s potential and that all of its departments support these endeavors; however, they also make it clear that existing federal securities law applies to tokenized securities all the same.
“The Commission’s recent enforcement actions involving AirFox, Paragon, Crypto Asset Management, TokenLot, and EtherDelta’s founder illustrate the importance of complying with these requirements,” the statement reads as a reminder that the SEC has been actively surveying the space.
The statement lays out three categories that have raised concerns and were the reasons for bringing actions against these blockchain-related projects.
Offers and Sales of Digital Asset Securities
It is the SEC’s opinion that all tokenized securities must be registered or will be liable for illegal issuances. They cite their actions against AirFox and Paragon as evidence that they are taking these issues seriously.
However, the SEC stresses that there still exists paths to compliance even when issuers have illegal, unregistered offerings.
For example, they write of how both AirFox and Paragon will have to pay penalties, but can still register their tokenized securities after-the-fact. However, they will also have to reimburse all participants who purchased the unregistered security token offerings illegally.
Pooled Investing in Digital Asset Securities
This year, TokenLot was taken to court for not registering as a broker but soliciting tokenized security sales on their site. The SEC cites this example in their statement as an example of “an unlawful, unregistered, non-exempt, public offering” by an investment fund. Another similar case was brought against Maksim Zaslavskiy last month.
All investment vehicles, including their managers, “must be mindful of registration, regulatory and fiduciary obligations under the Investment Company Act and the Advisers Act.”
Trading Digital Asset Securities
Finally, the SEC touched on the topic of trading tokenized securities.
They begin by praising blockchain technology and cite “decentralized trading platforms” as combining “web-based systems that accept and display orders” with new technology “such as smart contracts run on blockchain that contains coded protocols.” Although the SEC is open to these kinds of new trading systems, all exchanges engaging in trading tokenized securities must be registered with the Commission as a national securities exchange or request exemption.
They cite their most recent action against EtherDelta as an example of consequences if exchanges do not comply.
The SEC also mentions broker-dealer registration as another area where the tokenized security industry should be cautious and be attentive to the proper protocols.
“We support the application of beneficial technologies in our securities marketplace.”
The SEC ends their statement on a positive note, praising the potential blockchain could bring to the security token space. Yet, they make a friendly reminder to issuers, project leaders, and brokers: “consult with legal counsel concerning the application of the federal securities law.”
The recent precedent set by the SEC with these many actions against various crypto-related security token projects indicates that not only is the SEC deeply aware of them, but they are actively monitoring the space.
What do you think of the most recent statement by the SEC? Are the actions taken against these firms fair or is there room for disagreement? Post your comments below.
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