Initial Coin Offerings on Record Pace Even With Crackdown

(Bloomberg) -- The boom in initial coin offerings is showing few signs of abating even as U.S. regulators crack down on fraudulent digital-token sales and issue new warnings about risks to investors.

With three weeks left in the fourth quarter, startups issuing tokens have already garnered $1.38 billion from investors, and are on pace to surpass the $1.74 billion raised in the third quarter, according to industry researcher Token Report.

The number of ICOs is likely to reach 500 this quarter, compared with 266 in the third quarter, according to Token Report. So far this year, startups have raised a record $3.67 billion by issuing tokens, according to another tracker, CoinSchedule. That’s even after one in five ICOs failed in the third quarter, Token Report said.

While the industry is red hot, Securities and Exchange Commission Chairman Jay Clayton reiterated Monday that many token sales are effectively securities that should be registered with the agency. Clayton added that investors should be on high alert for promoters promising guaranteed returns, and he warned market participants about touting ICOs without determining whether they comply with securities regulations.

ICO Halted

“Any such activity that involves an offering of securities must be accompanied by the important disclosures, processes and other investor protections that our securities laws require,” Clayton said in a statement. “Investors should understand that to date, no initial coin offerings have been registered with the SEC.”

The SEC separately announced Monday that a San Francisco-based make of a restaurant-review app had halted a planned $15 million ICO after the regulator questioned whether the offering should have been registered as a security. Munchee Inc. faced a cease-and-desist order, but the SEC said it wasn’t fined because it quickly stopped the ICO and returned proceeds to investors. The company didn’t admit or deny wrongdoing.

On Dec. 4, the SEC won an emergency asset freeze to stop an ICO that the agency said has defrauded investors by promising a 13-fold profit in less than a month. The case was the first brought by a new SEC unit created in September to focus on misconduct involving distributed ledger technology and ICOs.

For months, Clayton and the SEC have been raising concerns that crooks are harnessing the technology to pull off a scam that is about as old as markets themselves: talking up an asset and then selling at an inflated price once the dumb money pours in.

“Experience shows that excessive touting in thinly traded and volatile markets can be an indicator of scalping, pump-and-dump, and other manipulations,” Clayton said in his Monday statement.

--With assistance from Matt Robinson

To contact the reporter on this story: Olga Kharif in Portland at okharif@bloomberg.net.

To contact the editors responsible for this story: Crayton Harrison at tharrison5@bloomberg.net, Jeremy Herron at jherron8@bloomberg.net, Jesse Westbrook, Gregory Mott

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