WASHINGTON: Wall Street's main regulator said on Tuesday that initial coin offerings (ICOs), a means of crowdfunding for blockchain technology companies, should be subject to the same safeguards required in traditional securities sales.
ICOs have become a bonanza for digital currency entrepreneurs by allowing them to raise millions quickly by creating and selling digital "tokens" with no regulatory oversight.
But the Securities and Exchange Commission (SEC) has declared that the tokens can be considered securities, and therefore, may be need to be registered unless a valid exemption applies.
The decision means that blockchain startups can no longer ignore investor protections, making it potentially more difficult for them to fundraise via coin sales.
By mid-July, tech firms raised about $1.1 billion in 89 coin sales this year, roughly 10 times more than that in the whole of 2016, according to data compiled for Reuters by crypto-currency research firm Smith + Crown.
The SEC's decision was released in an investigative report into a virtual organization known as The DAO. The DAO was created in April 2016 by a blockchain solutions company called Slock.it.
A blockchain is an online ledger of transactions maintained by a network of computers which gained prominence as the technology that underpinned digital currencies such as bitcoin.
The DAO was designed as a decentralized crowdfunding model in which anyone could contribute ethereum tokens to be a voting member and have an equity stake in the organization. Ethereum is another cryptocurrency.
Although it raised $150 million as of late May last year, an anonymous hacker later funneled $60 million of the tokens into a separate account.
The SEC said in its report it has decided not to bring civil charges at the end of its probe into The DAO, but instead use the case as a cautionary tale for the market.
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