ICOs, common sense and the long reach of the law

I’m scratching my head here.

Most respondents to CoinDesk’s poll question “Who should be most fearful after the SEC’s DAO token sale ruling?” answered “Nobody, very unactionable”.

CoinDesk poll on SEC impact

This goes a long way to explaining the continued momentum of initial coin offerings (ICOs). A quick look at any of the ICO tracking sites shows no shortage of upcoming sales, many of which look to the naked eye very much like securities.

Are the respondents on to something? Or are they buying into the tragic “it’ll never happen to me” fallacy?

The thing is, they’re probably right. The SEC doesn’t have the resources to “go after” every digital token that acts like a security but didn’t register.

But, its moves can be swift and sharp. Today CoinDesk reported that the SEC has ordered the temporary suspension of trading in OTC-listed CIAO Group over questions about ICO-related claims.

Whether this is a one-off or the beginning of a slew of actions is unclear (the fact that CIAO is a listed company is no doubt a significant influence). However, the chance of a sanction or even an investigation should be enough to give pause. It’s a career-breaker. Even if the SEC ends up giving the green light after poking around, the stigma of having been singled out will be difficult to wash off.

What’s more, almost all digital token issuers are young startups with shallow pockets. An SEC fine would financially cripple the founders for years. Even just doing a simple risk analysis of [potential cost * probability] vs [potential benefit * probability] shows that, in many cases, ploughing ahead on the assumption that you’re immune is just not worth it.

The likely outcome is that the SEC, having issued a warning shot and seeing that the industry didn’t really take it seriously, swiftly moves to take action. We can probably expect further precedents to be set over the next few months as the regulator decides to make examples of some of the more egregious cases.

Meanwhile, lawyers will continue to speculate on what the rather vague wording of the SEC statement means, cryptoasset entrepreneurs will continue to build new economic models and investors will continue to dream of rapid riches with no consequences. All part of the evolution, right?

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