Initial Coin Offerings

In a recent speech, new SEC Chairman Jay Clayton warned lawyers, who advice clients on bitcoins and initial coin offerings (“ICOs”), to be aware the SEC is lurking out there waiting to pounce.  Of course, he did not say it exactly like that, but he might as well have used those exact words.

Clayton stated that the SEC Staff is monitoring (he called it being on “high alert”) lawyers, who advice clients on these transactions.  Apparently, the SEC believes that certain lawyers may be advising clients to skirt the federal securities laws in the process.  In particular, he mentioned that ICOs were becoming more problematic.  ICOs are essentially mechanisms to raise capital for start-ups.  Additionally, despite the SEC’s pronouncement to the contrary that ICOs and bitcoins are governed by the federal securities laws, Clayton claims the SEC Staff has seen lawyers structure ICOs resembling securities transactions, and then claim the bitcoins are not securities.  For the record, the SEC has already brought several enforcement actions in this space to stop fraudulent activity.

Nonetheless, Chairman Clayton’s remarks are extraordinary because, given the lack of a judicial or statutory framework in this area, he is essentially suggesting lawyers have to be more certain as a legal matter in their opinions than Congress, the courts, and even his own agency.  Such a position is remarkable, and represents a titanic shift in the SEC’s previous policy of only going after lawyers who engage in fraudulent conduct.  I warned of this very possibility in an article I wrote several years ago, and the new administration apparently wants to continue the practice.  See http://www.foxrothschild.com/publications/the-empire-strikes-back-the-secs-new-assault-on-lawyers/.

Finally, Chairman Clayton’s warning is a sad commentary on the failure of a government regulator to actually address the real issue, and instead scapegoat a likely target.  Instead of twisting and misinterpreting Shakespeare’s famous and often misused quote “let’s kill all the lawyers” (Henry VI,” Part II, act IV, Scene II, Line 73), it would have been probably more worthwhile for Chairman Clayton to outline a set of new SEC specific rules or regulations in this area so that lawyers would be able to provide a definitive framework for their clients, who undertake ICOs or other bitcoin transactions.