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The SEC is cautioning market players about online organizations that offer digital asset purchases through “initial coin offerings” or “token sales.”

The SEC warning comes in an investigation report that found tokens offered and sold by an online organization known as The DAO were securities—“and therefore subject to the federal securities laws,” an SEC release says. The digital asset sales use use distributed ledger, or blockchain, technology.

The SEC says issuers of blockchain technology-based securities must register the offers and sales unless an exemption applies. Otherwise, participants can be liable for securities laws violations.

Blockchain technology firm Equibit Group says in a release that the SEC is effectively ruling that the digital assets are securities.

“IPOs that are masquerading as initial coin offerings have become a serious issue to those that are committed to the future of cryptocurrency, and we’re happy to see the SEC take these initial steps to clear up confusion between the two,” Chris Horlacher, chief executive of Equibit, says in a statement. “A true initial coin offering is a source of crowdfunding in support of a product or service, and should therefore not be held to the same rules and regulations as a security. Purchasers are not receiving a part of the issuing company any more than they would when pre-ordering a book from Amazon.”

The SEC says the DAO used a kind of “crowdfunding contract” though it would not have fallen under the regulator’s crowdfunding exemption because, “among other things, it was not a broker-dealer or a funding portal registered with the SEC and the Financial Industry Regulatory Authority.”

Read: Why fintech adoption is low in Canada — and why that will change

The SEC says it decided not to bring charges or make findings of violations, and is instead cautioning the industry and investors.

“The federal securities laws apply to those who offer and sell securities in the United States, 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 distributed ledger technology,” the SEC said in a statement Tuesday.

Also read:

Why fintech has an incentive to be regulated: BoC paper

TMX launches blockchain prototype for e-proxy voting

Originally published on Advisor.ca
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