Seth Holoweiko
87 Geo. Wash. L. Rev. 1472
2017 brought the rise of the initial coin offering (“ICO”), a novel fundraising concept that enables organizations to raise funds from anyone with an internet connection and a cryptocurrency wallet by selling tokens that will have some future purpose related to the companies’ products or services. But thus far, few ICOs have complied with Securities and Exchange Commission (“SEC”) regulations regarding the offering of securities to outside investors despite most tokens having the characteristics of securities, which would bring them into the SEC’s regulatory scope. In late 2017, the SEC began regularly enforcing registration and disclosure regulations against organizations launching ICOs, prompting many organizations to structure their ICOs such that their tokens appear to fall outside the definition of a security. But the SEC has continued its enforcement efforts, arguing that the organizations’ attempts to circumvent regulatory requirements in form do not change the substance underlying the transactions.
This Essay presents an expanded argument that tokens that have no practical use when sold, which are instead sold to raise funds for the underlying organization, constitute “investment contracts” and are therefore securities. It then argues that the SEC’s interpretation of securities to include tokens should receive Chevron deference in courts because the definition of a security is ambiguous, and the SEC is better positioned to make interpretations that can keep up with the fast-paced evolution of blockchain-based investment products.
