How Might Regulators Handle ICOs?
Recently, Facebook announced its new policy concerning cryptocurrency and Initial Coin Offerings (ICOs): It would ban all advertising relating to them, whether it was misleading or not. This extremely broad policy undoubtedly made many crypto entrepreneurs undoubtedly that other social media platforms would follow suit.
It might seem like the days of the gold rush, as some crypto entrepreneurs seek to draw attention to their offerings. What they may not have realized is that they probably have more to worry about from regulators than social media platforms banning their ads.
Regulators are stepping into the fray
France’s stock market regulator issued a statement that it was likely to start curbing advertising on financial products related to cryptocurrencies, considering them to be derivatives. This is not surprising, as some ICOs are tapping into that desire for quick money and bypassing the strict regulatory requirements associated with stock offerings. Suspect advertisements in the ICO arena are not hard to find, and regulators are concerned that uninformed ICO participants are being duped.
In the US, the Securities and Exchange Commission (SEC) is starting to react. On January 24th, SEC Chairman Jay Clayton and CFTC Chairman J. Christopher Giancarlo published an opinion editorial in the Wall Street Journal entitled “Regulators Are Looking at Cryptocurrency. At the SEC and CFTC, we take our responsibility seriously.” In that opinion piece, they stated that their “task as market regulators is to set and enforce rules that foster innovation while promoting market integrity and confidence.”
They warned lawyers, trading venues and financial services firms that they were “disturbed by many examples of form being elevated over substance, with form based arguments depriving investors of mandatory protections.” By using language to keep certain ICOs out of the SEC’s jurisdiction, investors are currently without any protections. They are living in the world of caveat emptor, or let the buyer beware.
Smart and prudent lawyers are advising clients to focus on offerings that are compliant with securities guidelines. Others are designing a variety of approaches designed to keep US investors out of their ICOs unless they are accredited investors. Yet others are designing ICOs so as to make them not fall within the jurisdiction of the SEC. For these reasons, the role of advertising linked to ICOs becomes that much more important.
Guidelines for advertising need clarification
Formal guidelines for advertising and marketing in this field have yet to be clarified. Some advertising is blatantly misleading. Last year, one crypto ad on Facebook used an image of a former New Zealand prime minister with a fake quote claiming that he invested in Bitcoin. However, most ICO advertising is not so easily identified as deceptive.
Then there are those crypto entrepreneurs who are concerned with self-regulating. They do not advertise low risks, large returns, etc. They avoid expressions that may be misleading. They realize that the innovative technology behind cryptocurrency does not mean that they are exempt from regulations that are designed to protect investors and regulate the market.
Social media platforms react
Other social media platforms, like Twitter, have not yet followed in Facebook’s footsteps. Some crypto entrepreneurs say that the Facebook ban did little to affect them. They are riding the tide, and not much can hold them back.
Facebook has said it will revisit its policy as the situation improves. It apparently made its policy quite broad in an attempt to make it difficult for scammers to profit from being on the platform. It is encouraging people to report ads that violate its policy.
Russia’s equivalent to Facebook, VKontakte, banned crypto ads and then unbanned them. They still, however, reject ads that promote unsupported guarantees. Google has existing policies that apply to misleading advertising and says that these policies apply to cryptocurrency, too.
The future
The entire ICO market is still in the experimental stage, but one thing is for certain: advertisers and those profiting from advertisements need to exercise caution, as do the lawyers, trading venues and financial services firms linked to ICOs. As our experience with ICOs grows and regulation increases, many believe that the opportunity for crypto entrepreneurs will actually grow substantially because the uncertainty currently affecting ICOs will disappear.
