Regulation by Selective Enforcement: The SEC and Initial Coin Offerings

Abstract

In addressing the problem of unregistered sales of digital tokens through initial coin offerings (ICOs), the SEC has proceeded through a strategy we call Regulation by Selective Enforcement. Rather than impose penalties on a significant number of violators, the SEC has brought a small number of significant cases. The SEC issued several extensive settlement releases that established without court intervention regulatory guidance about when ICO tokens are securities. The SEC has been able to pursue this strategy in part because there are multiple enforcers of the securities laws. State regulators and private plaintiffs have brought a significant number of cases against fraudulent ICOs, permitting the SEC to focus on developing issues of national importance. We conclude that while the SEC’s Regulation by Selective Enforcement strategy has been thoughtful and successful, some aspects of the agency’s approach are problematic.

Keywords: Securities, securities regulation, initial coin offerings, blockchain, Securities & Exchange Commission, securities fraud