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Former SEC lawyer talks about ICO regulation, regulators or law enforcement "pipeline"



According to former SEC lawyer Nicolas Morgan, the SEC is likely to launch a "pipeline" of law enforcement actions in the coming years against the emerging industry of ICO.

While the SEC released regulatory guidance for the ICO industry, it has also recently given an explanation of the DAO token as a security, but the agency has yet to announce official regulatory rules.

In response, the ICO industry has evolved in different directions. Some companies, such as tZERO, a subsidiary of Overstock, decide to be regulated, while others choose to move to other countries and issue tokens to build the resources needed for their software products.

But according to Morgan, ICO entrepreneurs may still be in trouble.

"Maybe you are right, your ICO may not be securities, some judges may agree with you, but is it worth the effort to get an answer from a judge?" He told reporters. "If your token and Securities are very similar, assuming it is a security and continuing to think about that assumption may be a better move. "
Morgan recently delivered a speech at the ICO summit in New York, where he spent seven years in the SEC law enforcement. In an interview with reporters, Morgan explains what the SEC will pay attention to in the next few years.

Note: The following interviews are edited and deleted.

CoinDesk: At what point do the SEC and other regulators oversee ICO?

Morgan: You do not get a satisfactory answer (about whether your token is a security) until the SEC's investigation is over, or you can initiate a lawsuit to see if the judge agrees that your ICO is not a security.
However, it is not necessary to conduct a trial, which takes place at the final stage of the legal proceedings. For example, in the case of Zaslavskiy, the SEC must go to court, they file a complaint and effectively state that "the token is a security."
Then they got a preliminary ruling from the judge that the token could be a security.
Or let's take Tezos as an example: someone in the San Francisco State Court filed a private lawsuit. The author is not the SEC.
The plaintiff and his lawyer said that Tezos's ICO involved securities. I have a feeling that the defendant's first line of defense is: "This is not a security and these special laws do not apply." At present, no judge has ruled.
In this regard, we still have no judicial decision and there may be a few-month blank.

Q: If a startup wants to issue its tokens in the form of securities, what does it need to do?

Morgan: If you want to do that, the first thing you decide is whether you issue tokens on the basis of your registration or get the exemptions. This may be the first question that startups need to face.
However, the second question is: What is your description in the process of selling tokens (ICO)? The use of proceeds, which may be the most crucial description for potential investors, will be subject to review by regulators or private plaintiffs.
The use of proceeds must be accurate. This is the first step.
Step Two: If you want to sell your membership of the advisory board, make sure you are really a consultant and have been approved for inclusion. When you describe your advisor or manage your identity, make sure your description is accurate, not exaggerated.
These things will be carefully examined.
The third thing is how you describe what you want to do. It's not about how to spend it, but about "We have a definite milestone and we're going to roll it out by January." Well, if you say that, and if the platform does not roll out on schedule in January, Then this may cause problems.
Be careful to describe exactly what you are doing.



Question: How did the SEC evaluate tokens in your "assembly line" and how did you investigate?

Morgan: The model may be a good analogy ... This is a special model in the PIPES market.
PIPES is an acronym for private equity investments, a way for hedge funds and other investors to invest in smaller public companies through public offerings.
The Securities and Exchange Commission has locked in a specific pattern in which hedge funds sometimes take the stock of a company short while buying its own private equity.
Law enforcement officials are concerned about this behavior. They do not like this practice, they think it is against the law and have issued dozens of summons for such acts.
The SEC has developed a model under which it will issue subpoenas and then sue the company quickly. Therefore, I think we will see a similar situation in the ICO area.
We have seen an ICO case. Obviously it belongs to the category of securities. They introduced a white paper, but did not provide a registration statement. Obviously they did not meet the exemption requirement. So, the SEC can issue a subpoena.
This is easy for the SEC, so I describe it as an assembly line. This will not be automatic, but in their opinion it is very easy to copy.

Question: Do you think the SEC will give more formal regulatory guidance soon?

Morgan:
Another way for the SEC to communicate is through lectures and public comments. We will also see a no-objection letter. So you can ask a very specific question: "If we do this, would you agree not to recommend action against us?"
The SEC is the most effective way to sue. And we will see more such cases.
In the ICO industry, some people also hope that the SEC can promulgate some laws and regulations. I think this is also likely to happen. However, rulemaking is a slow process.

Question: If the rules are introduced, will the SEC exempt the already running projects before the rules take effect?

Morgan: No, I do not think they will do it.
Question: Will the name of the project be affected? For example, some companies use "tokens", while others use "tokens."

Morgan: Economic reality is more important than labeling. Tezos may be a test case as they try to call their token a "donation."
But this is about economic reality, not labeling. This is the most crucial issue.

Question: In your opinion, how is the SEC doing in surveying and supervising this industry? Are you concerned about the way you regulate it?

Morgan: With regard to The DAO, the SEC is now very clear that it is the securities. I think the SEC has done a very good job in this area, but I think it is not enough.
They should make a statement about tokens. They will do so in the form of a non-objection letter and rules.
But I personally do not agree with the SEC's practice.
The disagreement I spoke about is that I think the law enforcement department will bring some cases of securities they think they have, but the defense may have a reasonable argument that it is not a security.
I am worried that there may be circumstances in which the SEC forcibly determines that some ICO projects are securities, because in these circumstances there are other undesirable factors such as fraud and money theft.
So we do not get the legal development we should have, nor do we think about whether securities are nuanced, because there are other facts that will mask this issue.