In a new investigative report, the Securities and Exchange Commission has stated that "Initial Coin Offerings" or "Token Sales", which involves offers and sales of digital assets by virtual organisations using blockchain or distributed ledger technology (DLT), may be subject to the requirements of the federal securities laws.

Considering the example of The DAO, the report said that the token sold by this organisation were securities and therefore subject to the federal securities laws. The SEC clarified that “Whether or not a particular transaction involves the offer and sale of a security—regardless of the terminology used—will depend on the facts and circumstances, including the economic realities of the transaction.” It said:

• The issuers of DLT-based securities must register offers and sales of such securities unless a valid exemption applies.
• Those participating in unregistered offerings also may be liable for violations of the securities laws.
• Securities exchanges providing for trading in these securities must register unless they are exempt.

The SEC explained that the main objective of the registration provisions of the federal securities laws is to ensure that investors are sold investments that include all the proper disclosures and are subject to regulatory scrutiny for investors' protection.

"The SEC is studying the effects of distributed ledger and other innovative technologies and encourages market participants to engage with us," said SEC Chairman Jay Clayton. "We seek to foster innovative and beneficial ways to raise capital, while ensuring - first and foremost - that investors and our markets are protected."

The report is the result of an inquiry by the SEC’s Enforcement Division to determine whether The DAO and associated entities and individuals violated federal securities laws with unregistered offers and sales of DAO Tokens in exchange for ether. On the basis of its findings, the agency decided to caution market participants and clarified that the federal securities laws apply to those who offer and sell securities in the US, regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through DLT.

"The innovative technology behind these virtual transactions does not exempt securities offerings and trading platforms from the regulatory framework designed to protect investors and the integrity of the markets," said Stephanie Avakian, Co-Director of the SEC's Enforcement Division.

The SEC has also issued an investor bulletin educating investors about ICOs.

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