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SEC Inquiry and Report Foreshadows Increased Scrutiny for Digital Coin Companies

The SEC recently acknowledged that businesses and individuals are increasingly using initial coin offerings to raise capital and the emergence of related technology could affect the funds industry. The agency issued an investigative report describing an inquiry into a virtual organization known as The DAO and its use of distributed ledger, or blockchain, technology to facilitate the offer and sale of DAO Tokens to raise capital.  The SEC determined after its inquiry that DAO Tokens were securities. The investigation was limited to The DAO organization and no enforcement action was pursued. However, the SEC report emphasized that “the U.S. federal securities law may apply to various activities, including distributed ledger technology, depending on the particular facts and circumstances, without regard to the form of the organization or technology used to effectuate a particular offer or sale.”  After the SEC released its report, stocks in digital currencies such as blockchain fell, the Wall Street Journal reported, even though industry participants said they had expected the SEC’s findings and did not expect to change their plans to raise money through coin offerings.  In a related news release, SEC Chairman Jay Clayton said: “The SEC is studying the effects of distributed ledger and other innovative technologies and encourages market participants to engage with us,” adding that while the agency seeks to encourage innovative ways to raise capital it also wants to ensure that investors and markets are protected.  The SEC also released an investor bulletin explaining initial coin offerings and highlighted the warning signs of investment fraud to investors.