The SEC’s view on ICOs is still not completely settled, but it’s progressed significantly in defining which tokens offered by startups should be considered securities.
Exchanges that offer these tokens have to register with the SEC and transparently self-report market activity surrounding these special coins. Brett Redfearn, director of the division of trading and markets for the SEC, is not pleased with what he’s seen in this particular department.
“We’re underwhelmed by the enthusiasm for coming within the regulatory structure right now. There are a number of exchanges that are trading ICOs that I would think that we would see more registrations,” he said to CNBC.
This is directly connected with the ambiguity in the SEC. The determination of whether or not a token enters the purview of the commission is done on something called the “Howey test.”
If a token clearly encourages investment in a startup with the expectation of returns due to the ICO’s performance, the Howey test would define it as a security. However, some investors get into ICOs expecting returns even if such a thing was never the purpose of the token it offers.
Redfearn himself admits that there is a little bit of ambiguity as far as this definition is concerned.
“We’ve created this pronged test, the Howey test, where people look at the different characteristics and determine if it’s a security. Quite frankly not all of them are obvious on its face exactly what it is,” he said.
The XRP token created by Ripple is a good example of an ambiguity of the Howey test that’s currently under debate.
A lawsuit was filed last month by a jilted investor who obviously bought XRP tokens expecting returns, despite the fact that they’re just instruments used in Ripple’s transaction network.
The investor came forward with allegations that Ripple made clear promises of returns for investors. However, Ripple’s CEO responded to the claims by saying that there’s nothing tying the XRP token strongly to the company itself.
In the broader picture, ICOs are now using SAFTs to attempt to circumnavigate these ambiguities, offering their tokens only to high-net-worth accredited investors rather than the public.