While the US Securities and Exchange Commission (SEC) found that, Ethereum, in its current state can no longer be classified as a security, the initial sale facilitated by the Ethereum Foundation likely was a security offering. But the SEC is paying attention and selling tokens to U.S. investors is no longer going to be unregulated - or such is the tone being struck by the regulator. The initial coin offerings (ICOs) that want to raise money from the U.S. investors will have to sell the tokens in either a private or a public offering compliant with the SEC regulations, and only marketplaces registered as an Alternative Trading System (ATS) will be able to provide liquidity for compliant tokens on the secondary market.

William Hinman, the Director of the Division of Corporation Finance at the Securities and Exchange Commission (SEC) made headlines last week when he declared that, based on his understanding, Ether is not a security and therefore is not subject to the securities laws in the U.S. However, based on Mr Hinman’s comments, the initial sale of Ether in 2014 by the Ethereum Foundation was almost certainly a security offering.

Mr Hinman believes that digital assets that were originally offered in a securities offering can become non-security utility tokens if the platform is sufficiently decentralized “where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts”. Mr Hinman said “when the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede. As a network becomes truly decentralized, the ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful.”

It is now clear that the initial sale of tokens for fundraising purposes is performed in a centralized manner and qualifies as a security offering in the U.S. Jay Clayton, Chairman of the SEC, spoke to CNBC just prior Hinman’s comments and said that any token that was used in a fundraising process and can give investors a return, or investors can get a return on the secondary market by selling the token to someone else, qualifies as a security. Mr Clayton said that these tokens can be sold in both private placement or public offering but issuers must take the responsibility the SEC laws require. In other words, from now on, the initial sale of tokens - to US investors at least - will be regulated unlike in the case of Ethereum in 2014.

The initial coin offerings (ICOs) or other tokenized fundraising methods that want to raise money from investors in the U.S. will have to sell the tokens in either a private placement or in a public offering. The most common method to comply is to use one of the exemptions to the registration requirement under the Securities Act. For the private placement, the exemption is Regulation D, Rule 506(c) and for public offering, the exemptions are Regulation A+, Regulation CF and Regulation S (see table). Regulation D only allows to raise money from accredited investors and Regulation S can only be used to sell to the investors outside of the U.S. Therefore the most common exemptions to sell tokenized securities are Regulation A+ and Regulation CF.

The biggest drawbacks of Regulation A+ and Regulation CF is the maximum amount that can be raised at $50Mn and $1.07Mn respectively. The House of Representatives passed a bill in March that increases the limit of Regulation A+ offerings to $75Mn, which is now in the Senate to be discussed and then voted on.