SEC shows support for ICOs that are not obviously securities

The SEC appears to have taken very thoughtful action on two crypto projects to date. Nay-sayers are predicting the end, while proponents of crypto dismiss the actions.

Here’s a quick analysis of what is actually happening. The two recent steps by the SEC were:

  1. The SEC actually issued a letter on one project — the ill-fated DAO. This was a project that allowed investors in the token to pool their funds and invest in other crypto companies (including C Corps that were in the crypto space). This was a clear sale of securities under almost anyone’s definition, as the investors were to receive ownership in a variety of crypto startups.
  2. The SEC recently contacted Protostarr and as a result of the verbal inquiry, Protostarr decided to “shut down and return all funds.” What was Protostarr doing? They were securitizing the income stream of YouTubers and Twitch casters, by letting investors get a percentage of the future revenues of those stars.

In both cases, even a non-lawyer can see that both were clearly securitization and under the SEC’s jurisdiction, as there were underlying assets in both cases. The DAO securitized equity, Protostarr securitized a future revenue stream much like a royalty on an artist.

My takeaway is pretty clear:

  • Protocol-level tokens (Bitcoin, Ethereum, etc.) do not have any assets of any kind underlying them and remain far from the SEC’s current focus.
  • Apps that give you a credit for future usage (Filecoin, Civic, Gnosis, etc.) are in my opinion still effectively pre-paid gift cards like an Amazon gift card, and are not covered by the SEC. I have no proof of this but the analogy is amazingly sound.
  • Apps that “sell future income streams” now have two examples of SEC scrutiny, and I would expect more.
That is why tokenization of assets like LAToken platform (stocks, real estate, and art) are not launching in the US operations which may attract SEC attention. LAToken postponed opening for the US such innovation as tokenized stocks and commodities which are currently tradable on the platform in other regions. At the same time, their LAT (which is not asset linked) is open for the US as it is similar to many other utility tokens giving a credit to pay for future platform usage such as assets tokenization, KYC, transactions etc. 

What happens to the rest of the ICO market? It’s not clear yet, but the SEC is clearly focused on the “low-hanging fruit” by going after examples where they can obviously win and have a great case against a weak opponent.

The DAO, for example, was already closed when the SEC issued their letter. And for Protostarr, both securities lawyers I know (J. Dax Hansen at Perkins Coie and Marco Santori at Cooley) would have told the Protostarr team that their idea was terrible in the first 5 minutes of an introductory call… just like they did when I first talked to them.