SEC ICO Investigations Stance: Howey Test, Fraud, and Whistle Blowers

SEC ICO InvestigationsA while back, Nick Morgan, a former SEC enforcement attorney, sat down with Epicenter, a podcast focusing on blockchain issues. Recommended listening for blockchain entrepreneurs and investors, Morgan unpacks how the SEC will likely handle crypto-related actions and investigations moving forward.

SEC ICO Investigations: Does Your ICO Pass The Howey Test?

Is your ICO compliant with SEC regulations? Morgan urged startups to consider the Howey Test — the case law standard for determining investment registration obligations.

What’s Howey’s focus? You can read an in-depth explanation here, but generally speaking, if an opportunity involves an “expectation of profit” that relies “on the efforts of others,” according to the Howey Test, it’s a security.

What Will The SEC Look For In Early ICO Investigations?

During the podcast, Morgan explained that SEC staffers would start any ICO investigation with an “information gathering process.” He speculated that attorneys and researchers for the commission would likely focus on offerings “where fraud is involved because […] the SEC would be cautious in bringing [actions in cases] where fraud did not exist.” In other words, any firms that promise to do X, but then turn around and do Y, have a higher chance of attracting the SEC’s attention. Morgan also believes that the regulatory agency will concentrate on ICOs that “victimize” many people.

How Will The SEC “Find” Its First ICO Fraud Target?

When asked how the SEC will zero in on its first ICO bust, Morgan predicts whistle blowing. If that happens, the person will get a percentage of “monetary remedies imposed and collected by the SEC” — which can amount to tens of millions of dollars.

SEC ICO Investigations: Are Heavy Regulations On The Cryptocurrency Horizon?

Startups and entrepreneurs in the blockchain space are concerned about an influx of regulations. When asked, Morgan encouragingly pointed out that Jay Clayton, the new SEC chair, “told lawmakers…that scaling back regulation could prod more companies to go public while he expressed skepticism that large corporate penalties deter fraud.”

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