Why the SEC Should Give Amnesty to Illegal ICOs

These developments were followed in early 2018 by a cascade of SEC subpoenas and enforcement actions targeting similar token offerings - many of which smacked of fraud.

The vast majority of ICOs conducted so far in the United States have violated federal law, and the ongoing trade in those tokens involves the illegal purchase and sale of unregistered securities.

The regulatory vulnerability of ICO promoters, the resulting market instability for existing security tokens, and the flight of American capital overseas where token sales remain unrestricted, make the whole situation a royal, Humpty Dumpty-scale mess.

Indicate that major cryptocurrency backers, along with their lawyers and lobbyists, recently met with Commission officials to request "a broad exemption from federal oversight" that would nevertheless permit the SEC to intervene in ICOs "If a token issuer committed fraud."

Although a "Broad" regulatory exemption for unregistered security tokens is not likely in the offing, the SEC has designed and implemented an amnesty program for a different class of securities law violators that could also serve as a blueprint for unscrambling problematic ICOs.

To start, issuers of unregistered security tokens would have to complete a formal SEC registration process for what are essentially replacement tokens.

Upon the approval of such a registration, issuers would have to swap old tokens for new tokens for all willing takers - a digital tender offer of sorts.

As an incentive to exchange old tokens for new ones, issuers would probably need to offer some additional consideration - possibly paid in new tokens rather than cash in order to preserve the company's operating capital.

To avoid the statutory bars against investors waiving compliance with the securities laws, this second leg of the required amnesty transaction should be structured as a settlement and release of any Section 12 Claims against issuers of old tokens.

Issuers of blatantly fraudulent ICOs have little chance of successfully registering their new tokens with the SEC, and therefore have little motivation to even try.