Wilson Sonsini Goodrich & Rosati is pleased to present the November 2017 issue of the WSGR Fintech Update. This latest edition features an article discussing CFTC guidance on virtual currencies, as well as an article on a recent SEC statement warning of the application of securities laws to endorsers and third-party marketers of initial coin offerings.
CFTC Speaks Up on Virtual Currencies
In October 2017, the U.S. Commodity Futures Trading Commission (CFTC), through its fintech initiative, LabCFTC, issued a primer on virtual currencies.1
The primer describes virtual currency as a digital representation of value that functions as a medium of exchange and cites bitcoin as an example of such a currency. The CFTC notes the following potential uses of virtual currency: storing value (like fiat currencies and precious metals); trading, along with the possibility of capital gains/losses and volatility; paying merchants for goods; and transferring value globally. The CFTC also uses the primer to warn the public of the potential risks posed by virtual currencies, including operational, cybersecurity, speculative, and fraud and manipulation risks.
CFTC Jurisdiction. In the primer, the CFTC reminds the public of its 2015 enforcement action, in which the CFTC took the position that a virtual currency is a commodity. It further notes that CFTC jurisdiction is implicated when a virtual currency is used as a basis for a derivatives contract or if there is fraud involving a virtual currency in interstate commerce (e.g., price manipulation). The CFTC also calls attention to its jurisdiction over virtual currency‑related swap execution facilities, derivative clearing organizations, and designated contract markets.2 In addition, the primer lists the following examples, among others, of prohibited activity involving virtual currencies:
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pre-arranged or wash trading in an exchange‑traded virtual currency swap or futures contract;
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a virtual currency futures, option contract, or swap traded on a facility that is not CFTC registered as a swap execution facility or a derivative clearing organization; and
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schemes regarding virtual currencies marketed to retail customers, such as off-exchange financed commodity transactions with persons who are not CFTC-registered.
No Conflict with SEC Jurisdiction. Moreover, the CFTC emphasizes in the primer that its position that virtual currencies (including those issued in initial coin offerings (ICOs)) are commodities does not conflict with the SEC’s position that virtual currencies issued in ICOs also may be securities.3
No Word on SAFTs. Interestingly, notwithstanding the widespread use of Simple Agreements for Future Tokens (SAFTs) in ICOs, the primer is silent on whether the CFTC has any jurisdiction over such agreements. Most market participants treat SAFTs as securities subject to SEC jurisdiction, and the primer does nothing to challenge that assumption.
2See our discussion of the CFTC’s approval a bitcoin options exchange and clearinghouse in our August 2017 WSGR Fintech Update.
3See our discussion of the SEC’s investigative report on virtual tokens in our July 2017 WSGR Alert. See also our follow‑up discussion on virtual tokens and initial coin offerings in our October 2017 WSGR Alert.
SEC Warns That Securities Laws May Apply to ICO Endorsements and Marketing
The SEC’s Division of Enforcement and the Office of Compliance Inspections and Examinations (OCIE) recently issued a statement regarding payments that artists, sports figures, and other celebrities may receive to endorse initial coin offerings (ICOs).1 The SEC issued an investigative report this past summer concluding that certain coins offered through ICOs are securities under the federal securities laws.2 As a result, marketing efforts by celebrities or other third parties of an ICO must comply with securities laws (to the extent that the coin being offered is a security). In particular, the SEC’s statement focused on:
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Disclosure. The SEC statement warns that ICO endorsements (and similar third-party marketing) may need to disclose the nature, scope, and amount of compensation received in exchange for the endorsement in order to avoid violating the anti‑touting provisions of the federal securities laws.3
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Broker-Dealer Status. The statement also warns that an endorser (or other third-party marketer) who accepts compensation in return for marketing an ICO may be acting as an illegally unregistered broker-dealer.
1In conjunction with the statement, OCIE also issued an investor alert encouraging the public to take certain steps when contemplating the purchase of an investment endorsed by a celebrity.
2 See our discussion of the SEC’s investigative report in our July 2017 WSGR Alert.
3See Section 17(b) of the Securities Act of 1933.
