SEC Subpoena? How Cryptocurrency Companies Should Prepare


The SEC is effectively expanding its jurisdiction into the cryptocurrency and ICO market. Dozens of companies, possibly hundreds, are receiving SEC subpoenas, which I advise them to take very seriously.

High profile companies, including giants like TechCrunch’s cryptofund, are currently dealing with these subpoenas. One of the problems is that nobody knows exactly what is going on, and the market is eager for the SEC to clarify the rules.

Do securities laws apply to cryptocurrency? The SEC says they do, but it is yet to issue a detailed guide for compliance. That is why securities lawyers like myself are playing an increasingly important role in the digital currency space right now.

In fact, the current legal uncertainty has driven many companies to move offshore, in order to avoid SEC scrutiny.

In this context, it is important to be prepared in case your company should receive a subpoena. The most important thing is not to confront the SEC directly or claim that they do not have jurisdiction. Instead, you should seek counsel and have them inquire about the agency’s concerns.

The safest path to disaster would be to talk to SEC officials without advice from an experienced securities lawyer. This could lead to self-incrimination and involuntary admissions of guilt.

Basically, the SEC is looking to determine whether your company should be registered, if it is dealing in what the SEC considers securities, or if it is somehow exempt from registration. As usual, anything you say during an interview with SEC staff could be used against you.

SEC Going After SAFTs

After careful consideration as to which companies are receiving subpoenas, a clear pattern emerges: the SEC is systematically targeting ICO projects working under the simple agreements for future tokens (SAFTs) framework.

Under this framework, issuers simply offer coupons for future tokens, that will be available when their cryptocurrency platforms are completed.

An anonymous source recently told CoinDesk:

“The SEC is targeting SAFTs. The new approach of the SEC is to consider tokens as both utility and security at the same time, meaning a token can bring utility to a platform but at the same time can be considered as a security if you sold it to parties that mainly looked for profit on its increase in value.”

The problem now is that SAFTs were largely thought to be on the safe side of securities laws. Now, the SEC is issuing 25-page subpoenas asking issuers for everything under the sun. At this point, the best investment you can make is securing representation from a top securities law firm.

What the cryptocurrency market needs is a regulatory framework that protects investors while enabling innovation.

The SEC’s recent enforcement actions against cryptocurrency fraudsters were meant to send a message. But the agency seems to feel that was not enough. We are living in a time of constant shifts in the regulatory space.

As the market evolves, regulators will try to keep up with it. and years will probably go by before we have a clear and determined framework in place to govern the digital tokens trade.

One thing is certain, the SEC subpoenas are going to keep coming, and companies should start preparing for them right now.

If you or your company are in the ICO and digital currency space the SEC says you must comply with their rules or face heavy sanctions. It’s a new area of law, filled with pitfalls for non-lawyers. Herskovits PLLC lawyers have 20 years’ experience representing people and companies facing SEC subpoenas.  Call to learn your options.

Call 212.897.5410 or Connect Online

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