In some ways, the legal landscape surrounding cryptocurrencies is very much a blank canvas. For example, no court has yet issued an opinion finding that a cryptocurrency—indeed, any cryptocurrency—is a security. But the converse is also true, and no court has held that a cryptocurrency is not a security. In a vacuum, this lack of guiding (let alone binding) precedent would be expected to yield a “wild west” atmosphere with issuers more than willing to test the legal waters in the hope of either making favorable law or, at the very least, taking comfort in legal uncertainty for some period of time.
But in the world of cryptocurrency, the United States Securities and Exchange Commission (SEC) has acted decisively to ensure the vacuum is sealed and to make issuers exceptionally uncomfortable with pushing the legal envelope. The SEC has made clear that, in its view, issuances of cryptocurrency (so-called “ICOs”) are securities offerings, and that issuers who fail to run the gauntlet associated with such offerings do so at their extreme peril.
This threat is not merely theoretical. In a well-publicized event, in January of this year, the SEC sued cryptocurrency issuer AriseBank and its two founders for securities violations relating to its then-ongoing ICO. AriseBank was looking to raise $1 billion in working capital for a “decentralized bank,” and claimed to have more than $600 million in the door when the SEC filed suit. But the SEC wasn’t content just to sue—it sought and obtained an immediate TRO and seizure of assets, bringing AriseBank’s business to an immediate and heart-stopping halt. According to public statements made by persons with knowledge of the events, some of the assets were seized at gunpoint in a dramatic scene more consistent with seizures of weapons or drugs.
To the extent the SEC was looking to make a point, it was mission accomplished. And if the SEC was looking for the ideal candidate to make an example of, AriseBank was picture perfect. It is important to keep in mind that the AriseBank situation presented several bad facts that helped it stand out for SEC action. The complaint filed by the SEC alleges that AriseBank made numerous false statements of material fact in connection with its ICO, including, most significantly, that AriseBank had purchased two FDIC-insured banks. In fact, according to the complaint, AriseBank had not purchased such banks, and the FDIC reported it had no pending applications from AriseBank. It probably didn’t help that AriseBank had made public statements last October that it would not “shiver in fear” and had “geared up for the coming fight with the SEC.”
Thus, this was not a situation where an ICO issuer was sued merely for offering cryptocurrency without SEC registration or exemption. However, the SEC’s actions in the AriseBank case make clear that its statements about how it will interpret coin offerings vis-à-vis federal securities laws and regulations are not mere recommendations. Anyone considering a coin offering as a means of raising capital should act with extreme caution and consult competent counsel before doing so. As AriseBank has learned the hard way, in the world of cryptocurrency, it is not better to ask forgiveness than permission.