'It was true for tulips, junk bonds, and mortgage-backed securities, and now crypto': There's a big shakeup happening in the ICO market, and it should be keeping investors up at night

Chris Concannon

The market for initial coin offerings is about to witness a two-part regulatory reckoning, according to Cboe president Chris Concannon.
The veteran trader said if such offerings are deemed as unregistered securities, then the SEC will go after industry participants and litigation will rise.
Crypto startups have raised billions of dollars via the fundraising method.

Chris Concannon, the president of Cboe Global Markets, is one of Wall Street's biggest crypto advocates. But the trading veteran thinks investors should lay awake at night worrying about the uncertainty hanging over the market for initial coin offerings, the popular crypto crowdfunding method.

"The reckoning will come in two waves," Concannon said in an interview with Business Insider. First, the SEC will go after ICO market participants. Then, class-action lawsuits against the teams behind ICO projects will surge.

Crypto investors cheered when William Hinman, the SEC's director of corporate finance, said last week that ether transactions would not fall under the agency's regulatory purview. Still, Hinman's remarks did not give the greenlight for companies to run an ICO, which enables a company to issue its own token in exchange for ether or bitcoin (which ideally would go towards building a product or business).

The market, which is known for its fair share of both fraud and big dreams, has allowed some tech startups to raise billions of dollars from a wide-spectrum of investors. In total, more than $7 billion has been raised via the fundraising method in 2018, according to data from Token Report. ICOs are traded on dozens of exchanges across the world and are popular investments among the more than 200 crypto hedge funds. Pantera Capital, one of the largest crypto investors, has two ICO funds, for instance.

If the SEC ultimately decides that the lion share of ICOs are unregistered securities, then many players in the market could find themselves in a legal quagmire.

"The actual party that offered the unregistered coin, they could have been involved in issuing an unregistered security," Concannon said. "Anyone who sold that off could be deemed an unregistered underwriter."

To be clear, the SEC could come up with an entirely new designation for ICOs. And it's not clear to some market observers whether the agency would retroactively go after all market participants. Robert Hockett, a professor of financial regulation at Cornell University, said you would likely only see the SEC take legal action in certain circumstances.

"I don't think it is the case that people involved in the business are going to be prosecuted against as if they have been violating the law," Hockett said. "But there is a little bit of a room for exception with something particularly egregious."

That could mean a company misled investors about a certain offering or claimed that it would never fall under the auspices of the SEC.

Either way, the story doesn't change for investors. If the SEC deems ICOs as unregistered securities, then their holdings would be rendered valueless. This, according to Concannon, would trigger the second wave of reckoning.

"If you sold someone an unregistered security you are liable to them if they decide to take them to court," Concannon said.

The market has seen a number of class-action lawsuits. Business litigation firm Silver Miller in late 2017 filed a class-action suit against Monkey Capital, a crypto hedge fund. The firm alleges the fund promoted its ICO that violated US securities law. Silver Miller also has pending cases against crypto exchanges Kraken and Coinbase.

Law firm Polsinelli, which is advising clients to approach the ICO market cautiously, said it has "only likely begun to see the beginning of class action lawsuits filed relating to blockchain-related companies or companies that participated in ICOs."

Some of those suits could have merit, said Cornell's Hockett.

"If they can prove investors were defrauded and misled by people who were better suited to understand the regulatory framework, but still instilled in investors a — no pun intended — false sense of security, then some suits would have merit."

For Hockett, the move indicates a shift in the market that is not without historical precedent. Crypto, he says, is moving out of the "Wild West" phase into a "regulatory scrutiny" phase, which in the short term will see the rise of funds to launch class-actions and increased litigation. But in the long term, it will see a cleansing of the market.

"It is a legal life cycle of every new asset that becomes highly popular," he said. "It was true for tulips, junk bonds, and mortgage-backed securities, and now crypto."

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