The SEC Man Cometh for ICO Attorneys

February 6, 2018

Michaela Ross,
Andrew Ramonas, and
Lydia Beyoud

Lawyers advising the booming cryptocurrency and token industry may soon face a reckoning
from the federal government, former SEC officials told Bloomberg Law.

The Securities and Exchange Commission is expanding its focus from the companies developing
initial coin offerings to the hundreds of lawyers who are guiding them through regulatory
gray areas. The industry argues it doesn’t fit neatly into existing legal frameworks
as global regulators consider whether virtual tokens might be securities — which require
strict regulatory compliance.

Attorneys that intentionally misadvised clients or failed to advise disclosure that
a token was a security to investors could be fined, prohibited from practicing before
the SEC, disbarred, or criminally charged, attorneys told Bloomberg Law.

“I can’t imagine this will end pretty for our sector,” said Aaron Wright, a professor
at Yeshiva University’s Cardozo School of Law and chairman of the Enterprise Ethereum
Alliance legal industry working group. “It could be pretty gruesome.”

The pressure on practitioners stems from their role in classifying the new digital
assets created by ICOs at a time when the industry is experiencing explosive growth.
Coin offerings raised between $4 billion to $6 billion in 2017 alone. There are no
regulations or case law that guide digital asset designation, so attorneys have relied
on decades-old precedent — such as the Howey Test — to help companies decide if their
assets will function like a currency, security, or a utility token, which can be redeemed
for future access to a product or service such as a game.

SEC Chairman Jay Clayton and other regulators have said most ICOs they’ve observed
create securities, which require sellers to register with the commission and comply
with more stringent laws.

Clayton has repeatedly targeted ICO attorneys in recent remarks, and signaled potential
action against practitioners. In at least three instances since December, he has said
attorneys need to act more responsibly to uphold securities laws when advising projects
and not mislead investors about the nature of a token.

Clayton signaled that more token offerings should be registered, and that ICO attorneys
may be failing their clients in that primary analysis because the clients are willing
to take the risk. “These lawyers appear to provide the ‘it depends’ equivocal advice,
rather than counseling their clients that the product they are prompting likely is
a security,” Clayton said Jan. 22 in a
speech to the Securities Regulation Institute in Washington.

He said he instructed the SEC staff to be “on high alert for approaches to ICOs that
may be contrary to the spirit of our securities laws and the professional obligations
of the U.S. securities bar.”

Opinions differ over what types of attorneys might be targeted: solo practitioners
who are self-proclaimed ICO experts or pedigreed lawyers from the toniest of corporate

But Clayton’s repeated and strident warnings are seen as a sure sign the SEC is poised
to bring down the hammer on legal professionals.

“You don’t go out on the road and say, ‘XYZ is a problem and it needs to stop’ if
you don’t have a few cases in your back pocket that shows that you’re handling the
problem,” John Reed Stark, president of cybersecurity firm John Reed Stark Consulting
LLC and former chief of the SEC Office of Internet Enforcement, told Bloomberg Law.

Enforcement Sweeps

Enforcement action could come in “sweeps” of cases against multiple ICOs and their
attorneys announced all at once, Stark said. If past is prologue, the SEC’s enforcement
actions in the ICO space are likely to start with “the low-hanging fruit” of attorneys
whose advice aided ICO clients in securities fraud or unlawful investments, he said.

In cases of alleged fraud, SEC enforcement staff often work with state or federal
criminal investigators, which could expand the potential liabilities for attorneys.

The SEC’s past actions against attorneys churning out opinion letters to support trading
in the microcap and penny stocks are good parallels to what could happen to those
in the ICO space, Stark said.

Although monetary penalties of several thousand dollars aren’t uncommon for attorneys
found to fall short of their obligations, more serious and long-lasting penalties
could include a prohibition on practicing before the SEC.

Some attorneys practicing in the crowded securities space have worked aggressively
to market their services to the burgeoning ICO industry. A suspension or prohibition
from representing clients before the SEC could be a major blow. “It can have a huge
impact on somebody’s livelihood,” Alec Koch, a partner at King & Spalding LLP in Washington
and a former SEC enforcement attorney, told Bloomberg Law.

Potential Foot Faults

Enforcement actions against securities attorneys typically involve allegations that
they were negligent or knowingly assisted clients in committing fraud, Nick Morgan,
a partner at Paul Hastings LLP in Los Angeles, told Bloomberg Law.

“That’s a different kind of case than a case against an attorney who in good faith
looks at a particular token” and concludes it’s not a security, said Morgan, a former
senior SEC enforcement trial attorney.

An SEC action grounded on alleged bad advice, coupled with the lack of judicial opinions
recognizing tokens as securities, would make enforcement suits against ICO attorneys
all the more remarkable, Morgan said.

SAFT: A Questionable Remedy

There’s disagreement in the ICO advisory community over how to comply with securities
laws. The “Simple Agreement for Future Tokens,” or SAFT, has emerged as one of the
most prominent mechanisms to satisfy SEC regulations and facilitate investments.

The SAFT resembles a “Simple Agreement for Future Equity,” a convertible note alternative
in securities-based crowdfunding. The SAFE and the SAFT are open to wealthy individuals
known as accredited investors. Federal law allows these investors to participate in
some offerings of unregistered securities, which may have more risk than those registered
with the SEC.

The SAFT was developed to help mitigate compliance risks associated with the ICO model,
according to attorney Marco Santori, who helped pioneer the tool.

“In the absence of regulatory clarity, the SAFT framework attempts to shift those
risks from the retail public to accredited investors who are better able to bear them.
The early results seem to be positive,” Santori, a partner at Cooley LLP in New York,
told Bloomberg Law.

But some are skeptical. The Cardozo Blockchain Project, a Cardozo Law School initiative
that examines cryptocurrency legal issues, in November published, “Not So Fast – Risks
Related to the Use of a ‘SAFT’ for Token Sales,” a report saying the agreement “rests
on a fundamentally flawed interpretation of U.S. securities laws.”

Others say traditional initial public offerings may be the only legal way to offer
token sales. However, an IPO fundraising vehicle could curtail the number of token
offerings due to the significant costs involved, Stark said.

Killing a Chicken

Joseph Grundfest, a Democratic former SEC commissioner, drew a parallel between Clayton’s
remarks and a Chinese idiom that someone can kill a chicken to scare monkeys. The
SEC might be trying to use its warnings to keep lawyers — the chickens — from helping
“illegal offerings” — the monkeys, he told Bloomberg Law.

“If the U.S. lawyers already in the SEC’s crosshairs change their tune on a going-forward
basis, then it’s entirely possible that the commission will take no action against
them,” said Grundfest, a Stanford Law School professor.

If, however, the SEC doesn’t see a change in behavior, all bets are off, he said.

“A chicken or two might then indeed meet its maker,” he said.

To contact the reporters on this story: Michaela Ross in Washington at; Andrew Ramonas in Washington at; Lydia Beyoud in Washington at

To contact the editor responsible for this story: Michael Ferullo at

Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.

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