SEC issues advisory on initial coin offerings

With virtual currency gaining popularity among new investors, the Securities and Exchange Commission warned against groups enticing the public to invest in “initial coin offerings” and to purchase such currency.

According to an advisory issued by the SEC’s Enforcement and Investor Protection Department, virtual currency refers to a digital representation of value issued and controlled by its developers and used and accepted among the members of a specific community or users. An initial coin offering (ICO) is the first sale and issuance of a new virtual currency to the public usually for the purpose of raising capital for startup companies or funding independent projects.

“Based on the information gathered by the Commission, some of these new virtual currencies, based on the facts and circumstances surrounding their issuance, follow the nature of a security as defined by Section 3.1 of the Securities Regulation Code (SRC). However, unlike ordinary securities, these virtual currencies are neither guaranteed by any Central Bank nor backed by any commodity,” the SEC said in an advisory.

In an ICO campaign, a percentage of the total available virtual currency is sold to interested buyers in exchange for fiat currency; another virtual currency; or another asset or security.

“There is a strong possibility that the said virtual currency is a security under the jurisdiction of the SEC and has to be registered and necessary disclosures have to be made for the protection of the investing public.” The advisory said that if a scheme involves the sale of securities to the public, the SRC requires that these be registered and the appropriate license or permit to sell are issued to a corporation or its agents.

The commission added that those who act as salespersons, brokers, dealers or agents of ICO entitites in selling or convincing people to invest in the scheme such as solicitatons or recruitment through the internet must be registered with the SEC.

“Those who invite or recruit other people to join or invest in this venture or offer investment contracts or securities to the public may be held criminally liable or ac- cordingly sanctioned or penalized in accordance with the Supreme Court decision in the case of SEC vs. Oudine Santos (G.R. No. 195542, March 19, 2014),” SEC warned.

Among the signs to look out for are if a promoter, issuer, broker or salesperson guarantees returns, if the potential investment “sounds too good to be true” or if they pressure the investor to act hastily.

“The public is hereby advised to be vigilant when investing in this kind of activity and to make the necessary precautions in dealing with ICO entities.” /