SEC ICO

This week, the SEC issued a statement that may potentially drive the nail in the coffin of the American crypto market. The ICO Framework they developed, as well as their corresponding response to a no-action request, clearly defined their take on ICOs. While some may view their stance as favorable, others think the move will put the US years behind the global blockchain community.

The SEC ICO statement

The SEC’s suggested ICO framework tentatively broached the subject of utility tokens in the blockchain industry. ICOs in the past few years have largely tried to fly under the “utility” cloaking so as to avoid SEC regs. And truthfully, most of them were not utility tokens at all.

And by “tentatively broached” I mean this framework is not a guidance, nor a ruling. According to the SEC:

“The framework is not intended to be an exhaustive overview of the law, but rather, an analytical tool to help market participants assess whether the federal securities laws apply to the offer, sale, or resale of a particular digital asset.”

In other words, blockchain companies based in the US or those wanting to market to US residents must still figure things out without concrete guidance.

SEC ICO
SEC ICO Framework published by FinHub

Letter of No Action

The SEC published the framework at the same time they sent a response Letter of No-Action to a company wanting to hold an ICO for a utility token. TurnKey Jet, Inc. (TKJ) is the company that received the No-Action letter from the SEC. In the letter it was made clear that TKJ can operate their air taxi business, perform an initial token offering and use their platform’s utility token without SEC oversight. As long as they pass with flying colors the SEC’s guidelines.

Who is TurnKey Jet?

TKJ is an airplane taxi company that leases by the hour. The company intends to use their token to improve efficiency in several ways:

  • Reduce international settlement fees
  • Speed up payment processing (from wire transfers)
  • Gain the ability to transact outside of regular banking hours

Their air charter service allows customers to use tokens within the TKJ network for TKJ-related services only. Users on the platform include:

  • Travel brokers
  • Consumers who use air taxis
  • Carriers

Then What’s the Problem?

There were a few catches. In order for TKJ to run their ICO for their utility token and without SEC oversight, they basically stripped most of the features of the ICO itself. Here are a few examples of how TKJ is structuring their token offering in order to cut the mustard within the SEC framework:

  • Funds raised during the ICO cannot be used to develop the product or service. The meaning here is that any product, app or service attached to a utility token’s ICO must be fully up and operational before the ICO.
  • The funds raised can only be used to provide the services rendered within the platform.
  • Each token must be tethered to $1.00 USD.
  • Only token transfers between TKJ wallet holders are allowable. No external wallets.
  • Tokens essentially act as prepaid coupons for TKJ air services.
  • TKJ may not market the token in any way that expresses the possibility of the token’s value increasing. They can market the functionality but not the marketability of the token.
  • Tokens are not tradable on exchanges.

Is it an ICO or not?

By doing all of the above, TKJ successfully avoided registering its sale with the SEC. To accomplish this, they held a token sale that is a completely different animal from most ICOs we know. The token, as you can see from the above restrictions, has very few and specific functions within the TKJ platform.

This may work for businesses wanting to improve efficiency. But the token allows only network-dependent usage by network participants looking to do a very specific thing. At this juncture, it’s hard to understand why an ICO would even be held.

Theories and Thoughts

  • Instead of guiding companies who want to use an ICO to crowdfund for a developing project, now the SEC may seem more focused on enabling established, traditional tech companies like Facebook and Amazon to begin using utility tokens. Writer, Jon Rice of CryptoBriefing.com, explained how this constitutes what he calls “The Zuckerbezos clause”.
  • It’s quite possible that this is just a baby step for the SEC in approving utility tokens. The fact that they officially admitted that one ICO token is strictly a utility token and not a security might seem like progress to some.
  • The big question that remains is what happens to other utility tokens like Ether? The Ethereum ICO would not have come close to meeting the guidelines that TKJ implemented. Yet plenty of American investors are holding, buying and trading Ether today.
  • US blockchain businesses and those wishing to market to the American investment engine must still make use of the 73-year-old Howey Test to determine if their token is a security or not. The blockchain industry needs a new benchmark, one that reflects an understanding of digital assets and decentralization.
  • The direction the SEC has taken with this framework points to a future filled with fiat backed stable coins, a far cry from cryptocurrency.
  • Token sales under this framework cease to be crowdfunding, thus gutting out the distributed version of VC competition.

It’s understandable that the SEC would want to try and tame this industry. It’s not so much that they want to get their slice of the pie. They only charge $121.20 per $1,000,000 for companies to register a security. It’s more about control and the SEC and other regulatory bodies trying to fit cryptocurrencies into their world view.

It’s not just Americans who are feeling this

For countries that embrace blockchain innovation and cryptocurrencies, such as Singapore, Lithuania, and Switzerland, the SEC has effectively removed all potential US investors from participating in their crypto crowdfunding efforts. The restrictions reach far and wide:

  • It’s illegal for Americans to participate in ICOs for tradable tokens that the SEC does not oversee and regulate.
  • American companies cannot hold ICOs unless they adhere to the ridiculous conditions that enable nothing more than a glorified air miles program.
  • It’s illegal for all companies worldwide to include Americans in their ICO promotions unless of course it’s for a utility token that fits into the restrictive SEC Framework.

“American capitalism refuses to endorse a genuinely free market or the right to voluntary exchange, what the hell is the point of this economic system anyway?” – Jon Rice

Summary

Essentially, US investors now know that investing and trading cryptocurrencies are only allowable when under the watchful eye of the American regulatory system.

No matter how you viewed the SEC ICO Framework, we have to admit that cryptocurrencies are much more on the mind of regulators than just a year ago today. More and more people from all industries and walks of life are seeing the potential. But we may come to depend solely on non-US countries to really drive the industry’s imminent global expansion.

It’s been almost two years since the SEC caught wind of the wild west ICO movement. And so far, this is what they’ve come up with? How long will it take for them to begin regulation talks on Initial Exchange Offerings (IEOs)? Maybe self-regulation of the crypto market will end up being a panacea to the problem of uninformed regulation.

It also reminds us of other legacy systems. It’s possible the SEC is too wrapped up in a complex, multi-layer quagmire of American style bureaucracy to effectively support this fast-moving industry. Possibly the system is just too heavy to get out of its own way, or too self-important to realize the potential of decentralization.

Be sure to Follow us on Twitter to hear the latest in cryptocurrency news and helpful tutorials.

HedgeTrade

Also published on Medium.