Initial Coin Offerings and the Texas State Securities Board: Leading the Way or Going Astray?

Cease and Desist Orders Issued Against Cryptocurrency Companies

The Texas State Securities Board recently issued emergency cease and desist orders against different cryptocurrency companies for violating sections of the Texas Securities Act. Texas was the first state to issue an administration order on cryptocurrency. In particular, the Texas State Securities Board alleged these companies were illegally and fraudulently offering investments in the State of Texas, which were considered securities and subject to regulation by the Texas Securities Act.

Cryptocurrency Companies Holding Initial Coin Offerings (ICOs)

These cease and desist orders followed announcements by cryptocurrency companies to hold Initial Coin Offerings (ICO). Additionally, public solicitations (i.e. statements that may create a false sense of urgency to invest), claims of profitability, recruitment of sales agents, and misleading and deceptive statements, to name a few were alleged in the Texas State Securities Board’s cease and desist orders.

Securities Board Seeks to Prevent Initial Coin Offerings as Unregistered Securities

ICOs may serve a similar purpose as venture capital in providing a source of funding for startups.  While the Texas State Securities Board appears to be making a concerted effort to prevent promotion of unregistered securities in the form of Initial Coin Offerings, the Texas State Securities Board maintains that it does not seek to regulate cryptocurrencies but to monitor and prevent illegal and fraudulent cryptocurrency-backed programs.

Securities Board Warn Investors Against Initial Coin Offerings

As a relatively new source of funding, Initial Coin Offerings allow investors to purchase a new type of cryptocurrency in exchange for another more established type of cryptocurrency in the form of virtual coins or tokens.  The Texas Securities Board, as well as other securities boards, caution investors in participating in Initial Coin Offerings because many coins or tokens are not securities or registered with the Securities Exchange Commission (SEC).  Thus, protection from fraud or theft may be limited.

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