On 1 November, the US Securities and Exchange Commission (SEC) issued a warning in respect of celebrity endorsements of initial coin offerings (ICOs). The statement was that:
“Celebrities and others are using social media networks to encourage the public to purchase stocks and other investments. These endorsements may be unlawful if they do not disclose the nature, source, and amount of any compensation paid, directly or indirectly, by the company in exchange for the endorsement.”
This statement follows a number of ICOs being promoted by celebrities including boxing champion Floyd Mayweather Jr, socialite Paris Hilton and football personalities Luis Suarez and Harry Redknapp. The SEC suggests that these endorsements are often part of a paid promotion and therefore may be a violation of the anti-touting provisions of the federal securities law.
The announcement comes at a time when the number of ICOs being launched has skyrocketed. As of November 2017, an estimated $3 billion has been raised from token sales through ICOs, including the $262 million raised by Filecoin and the $232 million raised by Tezos. Another startup, Overstock.com, is attempting to raise $500 million later this year.
With the value of digital currencies reaching new heights (Bitcoin is valued at over $9,000 as of the time of writing), a wide range of projects are being launched with token sales, with an estimated 100 ICOs to launch in November and December of 2017 alone. The benefit of ICOs allows developers to raise funds faster than traditional venture capital funding. However, there has also been a spike in fraudulent ICOs, where the fundraisers have disappeared after raising money from investors.
The SEC has published a report on whether tokens from ICOs can be deemed as securities. This report was a result of their investigation in the DAO, which crashed as a result of a flaw in its smart contract that was exploited. Following that investigation, the SEC deemed that DAO tokens were securities under US legislation.
In July of this year a co-founder of Ethereum called Charles Hoskinson was quoted as stated that ICOs are over-tokenising their businesses and that investors are being blinded by the potential to make fast and easy money.