Last week, the Securities and Exchange Commission said that many online trading platforms for digital assets, including coins and tokens offered in Initial Coin Offerings, should be registered with the Commission as a securities exchange. The agency’s remarks are the latest in a series of efforts recently to clamp down on the market for cryptocurrencies.
The SEC in a statement said a number of online trading platforms facilitate the trading of digital assets that meet that definition of a “security” under federal law. Such platforms need to be registered as a national securities exchange or operate under an exemption from registration, such as the exemption provided for alternative trading systems under Regulation ATS.
“The SEC staff has concerns that many online trading platforms appear to investors as SEC-registered and regulated marketplaces when they are not,” the agency said. “Many platforms refer to themselves as ‘exchanges,’ which can give the misimpression to investors that they are regulated or meet the regulatory standards of a national securities exchange.”
SEC Chairman Jay Clayton has in the past expressed concern about the use of ICOs to raise capital and urged investors to exercise caution. The statement marks another effort by the SEC to protect investors and emphasizes the Commission will continue to focus on platforms that offer trading of digital assets to make sure they’re in compliance with federal securities laws.
Whether a transaction involves the offer or sale of a security depends on the facts and circumstances. The SEC has analyzed whether tokens are securities using the Howey Test, a test outlined in the U.S. Supreme Court’s 1946 ruling in SEC v. W.J. Howey Co. Under the test, a transaction is a security if:
- It is an investment of money;
- There is an expectation of profits from the investment;
- The investment of money is in a common enterprise; and
- Any profit comes from the efforts of a promoter or third party
Later cases have expanded the term “money” to the Howey Test to include investments of assets other than money.
SEC-registered national securities exchange are subjected to regulatory standards. Among other things, they must have rules designed to prevent fraudulent practices. They must also have procedures governing the discipline of its members and enforce their compliance with federal securities laws.
Regulation ATS provides an exemption from registration for alternative trading systems. Entities seeking to operate as an ATS are also subject to certain requirements, including registering with the Commission as a broker-dealer.
The SEC said some online trading platforms may not meet the definition of an exchange, yet offer trading and other services related to digital assets that are securities. For example, some platforms offer digital wallet services or transact in digital asserts that are securities. These types of services can trigger other registration requirements, such as broker-dealer or transfer agent.
In addition, the SEC warned a platform that offers digital assets that are securities may be participating in the unregistered offer and sale of securities of those securities are not registered or exempt from registration. Those who promote an unregistered public offering of securities can face criminal or civil penalties and could have trouble raising additional capital.
The SEC said “[t]o get the protections offered by the federal securities laws and SEC oversight when trading digital assets that are securities, investors should use a platform or entity registered with the SEC, such as a national securities exchange, alternative trading system (“ATS”), or broker-dealer”.