SEC shows support for ICOs that are not obviously securities

Gil Penchina
Over the past year, the chorus of voices that are calling for blockchain's adoption in the medical profession is growing increasingly loud.

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.

The takeaway: Securitization of assets like LAToken (assets like art and real estate), Onegram (gold) and others will continue to receive SEC scrutiny and these sorts of innovations will move offshore (LAToken is offshore). This is entirely appropriate, given the SEC's purview over sale of derivatives.

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.