In a recent op-ed, DNotes Global Inc. co-founder and CEO Alan Yong addressed the issues surrounding initial coin offerings (ICO) and the Securities and Exchange Commission’s role in protecting investors. In his remarks, he explained why ICOs have presented such a challenge for regulators.
The SEC was created by an act of Congress, the Securities Exchange Act of 1934. That act was designed to restore investor confidence in the aftermath of the Great Crash of 1929. In the 9 years prior to that crash, an estimated $50 billion had been raised through the sale of new securities, and roughly half of them were rendered worthless after the crash.
The SEC’s mandate was to protect investors and maintain fair, orderly, and efficient markets that could facilitate capital formation. To accomplish those multiple missions, the SEC established rules and guideline that required securities to be registered or exempted by the SEC before they can be legally sold. The SEC uses registration as its primary means for obtaining and maintaining full disclosure of all essential information investors need to make an informed decision before investing.
Alan expressed the harsh reality facing initial coin offerings: “I wish that ICOs could be structured and conducted in ways that meet existing security laws, either through registration or exemption. Unfortunately, without significant changes to existing laws, it is simply not possible. To date, the issuers of ICO tokens are exclusively decentralized entities without any central authority. Moreover, the money collected goes to individuals, partnerships or incorporated companies that claim to be working on some great ideas presented in a white paper. Meanwhile, the investors have no ownership or voting rights in the private entity that received the investment.”
Mr. Yong suggested that the conundrum is clear, and not at all surprising. Technologies often get ahead of regulations. In the case of ICOs, the technologies have gotten way out in front of the regulations, and in a massive way. Over $4 billion has been raised worldwide with no sign of slowing down – and none of those ICOs have been registered with the SEC. Unlike corporate shares, there are no provisions, existing rules, or regulations governing decentralized entities. Worse, the SEC does not have the means of obtaining and maintaining full disclosure of the essential information investors need to make an informed decision.
SEC Chairman Jay Clayton recently said, “Investors should understand that to date no initial coin offerings have been registered with the SEC.” https://www.crowdfundinsider.com/2017/12/125792-sec-chairman-jay-clayton-issues-statement-initial-coin-offerings-cryptocurrencies/
In the same article, Clayton added, “Specifically, we concluded that the token offering represented an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.”
In other words, with no known exception, tokens are securities. Since it is illegal to sell securities that are not registered or exempt with the SEC, this confirmation from the SEC Chairman is very troubling. The Chairman went on to explain that, “Tokens and offerings that incorporate features and marketing efforts that emphasize the potential profits based on the entrepreneurial or managerial efforts of others continue to contain the hallmarks of a security under U.S. law.”
For honest companies that want to do things the right way, all of this can be very frustrating. ICOs have proven to be extremely effective options for raising capital. As Yong notes, though, there may be no legitimate way to conduct an initial coin offering that properly complies with current laws and regulations.
Yong suggested that DNotes Global Inc. would take a different path to capital formation, to ensure that it avoids the ICO conundrum.
“The good news is that ICOs are not the only way to raise the funds needed to advance project goals. For DNotes, we believe that Reg. A+ Mini-IPO Title IV Tier 2 is a superior option, and one that won’t run afoul of current laws or SEC regulations. That’s why this capital formation option has been a part of our planning process for more than two years.”
According to Yong, DNotes has traditionally taken a different path than most other cryptocurrencies. With DNotes Global Inc.’s plan to raise capital using Reg. A+ Mini-IPO Title IV Tier 2, the company continues to chart its own unique course to a more inclusive financial future for people everywhere.
About DNotes and Alan Yong:
DNotes co-founder Alan Yong is a well-regarded visionary who established Dauphin Technology in 1988. He is the author of the book “Improve Your Odds: The Four Pillars of Business Success, and is well-regarded as a “thought leader” in the cryptocurrency industry.
DNotes is a digital currency noted for its consistent and reliable growth, and innovative initiatives that actively engage women, young people, small businesses, workers, and others – effectively inviting the world to participate in the digital currency revolution. DNotes Global, Inc. has plans to launch DNotes 2.0 in early 2018, with improved features and functionality.