Tuesday, 1 May 2018

Registration requirement under the U.S. Securities Act 1933: Exemption for ICO offers made outside the United States

Since the publication of the DAO report ("Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO" (Release No. 81207)) last summer, the U.S. Securities and Exchange Commission (SEC) has been flexing its muscle to ensure that the securities regulations of the United States will not be flouted by ICOs (Initial Coin Offerings).

If an ICO issuer wants to avoid the registration requirement under section 5 of the Securities Act 1933, it has to come within one or more of the stipulated exemptions, one of which concerns offers and sales made outside the United States (Regulation S: 17 CFR 230.901 et seq). The making of Reg S in 1990 preceded the age of internet trading. In 1998, with the growing use of the internet, the SEC issued a note on interpretation (Interpretation Re: Use of Internet Web Sites To Offer Securities, Solicit Securities Transactions, or Advertise Investment Services Offshore). It purports to clarify the meaning of "directed selling efforts" of Reg S (17 CFR 230.903(a)(2)) in the context of internet trading.

With the increasing activism of the SEC in the ICO sphere, clarifying its geographical outreach has become important. Reg S read in conjunction with the 1998 Interpretation, however, begs a number of questions as to how they are to be applied to ICOs. I have noted some such questions in the attached document here.


Many of these questions would equally arise in crowdfunding without blockchain tokens. But if the internet has increased the risk that foreign securities will flow back into the United States, the ICO tokens will aggravate the problem with their high mobility and anonymity in trading.

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