In groundbreaking news for the blockchain community, moments ago the SEC issued a press release, referencing an investor bulletin on Initial Coin Offerings, which concluded that DAO Tokens, a Digital Asset, are securities for regulatory purposes, and cautioned that US Securities law "may" apply to offers, sales and trading of interested in virtual organization, targeting the increasingly more popular Initial Coin Offerings.

Capital raising through blockchain requires compliance with federal securities laws https://t.co/IjOxjoVdfK — SEC Enforcement (@SEC_Enforcement) July 25, 2017

As a result of this change of treatment, those who use ICOs to sell tokens, which as a reminder have now surpassed over $1 billion in net proceeds, will have to register the tokens as securities, those participating in unregistered offerings may be liable for violations of the securities laws, and that the purpose of the registration "is to ensure that investors are sold investments that include all the proper disclosures and are subject to regulatory scrutiny for investors' protection."

In a press release issued on Tuesday afternoon, the SEC said it had issued an investigative report "cautioning market participants that offers and sales of digital assets by "virtual" organizations are subject to the requirements of the federal securities laws." Such offers and sales, conducted by organizations using distributed ledger or blockchain technology, have been referred to, among other things, as "Initial Coin Offerings" or "Token Sales." In its first official regulatory intervention of ICOs, the SEC said that "whether a particular investment transaction involves the offer or sale of a security – regardless of the terminology or technology used – will depend on the facts and circumstances, including the economic realities of the transaction."

Some more details from the report, highlights ours:

The SEC's Report of Investigation found that tokens offered and sold by a "virtual" organization known as "The DAO" were securities and therefore subject to the federal securities laws. The Report confirms that issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies. Those participating in unregistered offerings also may be liable for violations of the securities laws. Additionally, securities exchanges providing for trading in these securities must register unless they are exempt. The purpose of the registration provisions of the federal securities laws is to ensure that investors are sold investments that include all the proper disclosures and are subject to regulatory scrutiny for investors' protection. "The SEC is studying the effects of distributed ledger and other innovative technologies and encourages market participants to engage with us," said SEC Chairman Jay Clayton. "We seek to foster innovative and beneficial ways to raise capital, while ensuring – first and foremost – that investors and our markets are protected." "Investors need the essential facts behind any investment opportunity so they can make fully informed decisions, and today's Report confirms that sponsors of offerings conducted through the use of distributed ledger or blockchain technology must comply with the securities laws," said William Hinman, Director of the Division of Corporation Finance. The SEC's Report stems from an inquiry that the agency’s Enforcement Division launched into whether The DAO and associated entities and individuals violated federal securities laws with unregistered offers and sales of DAO Tokens in exchange for "Ether," a virtual currency. The DAO has been described as a "crowdfunding contract" but it would not have met the requirements of the Regulation Crowdfunding exemption because, among other things, it was not a broker-dealer or a funding portal registered with the SEC and the Financial Industry Regulatory Authority. "The innovative technology behind these virtual transactions does not exempt securities offerings and trading platforms from the regulatory framework designed to protect investors and the integrity of the markets," said Stephanie Avakian, Co-Director of the SEC's Enforcement Division. Steven Peikin, Co-Director of the Enforcement Division added, "As the evolution of technology continues to influence how businesses operate and raise capital, market participants must remain cognizant of the application of the federal securities laws." In light of the facts and circumstances, the agency has decided not to bring charges in this instance, or make findings of violations in the Report, but rather to caution the industry and market participants: the federal securities laws apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology. The SEC's Office of Investor Education and Advocacy today issued an investor bulletin educating investors about ICOs. As discussed in the Report, virtual coins or tokens may be securities and subject to the federal securities laws. The federal securities laws provide disclosure requirements and other important protections of which investors should be aware. In addition, the bulletin reminds investors of red flags of investment fraud, and that new technologies may be used to perpetrate investment schemes that may not comply with the federal securities laws. The SEC's investigation in this matter was conducted in the New York office by members of the SEC's Distributed Ledger Technology Working Group (DLTWG) -- Pamela Sawhney, Daphna A. Waxman, and Valerie A. Szczepanik, who heads the DLTWG -- with assistance from others in the agency's Divisions of Corporation Finance, Trading and Markets, and Investment Management. The investigation was supervised by Lara Shalov Mehraban.

The SEC's decision to "register" ICOs may have a similar effect to its denial to allow a bitcoin ETF, which initially sent the price of bitcoin tumbling but then promptly reversed, and pushed it back to all time highs.

While the SEC's intention to regulate ICOs will probably have an initial chilling effect on the market as it will make issuance of ICOs more difficult, it will also prove to be a blessing in disguise as it not only validates the blockchain capital-raising mechanism, allowing the entrance of major banks to use it as a fintech alternative to IPOs, but considering some of the utterly idiotic and doomed to failure ICOs that have been observed in recent weeks, curb the proliferation of ponzi, pyramid and other get rich quick schemes which in many cases are beyond borderline criminal.

It will also also reduce the risk of drastic losses once the initial euphoria period passes, and only the more serious and credible coin offerings remain as a result, something which ultimately will benefit the blockchain in general, and ethereum in particular.

Ultimately regulation of ICO will greenlight the eventual use of cryptos as eligible collateral in capital markets transactions, something Bank of America said in a report earlier today is critical to truly unleash the crypto community to its next evolutionary step in replacing fiat.

Whether cryptocoin enthusiasts like it or not, regulation (and enforcement) will lead to a sturdier blockchain ecosystem, and while the potential for dramatic upward moves will be limited, so will the likelihood of catastrophic losses.