In a newsletter to clients sent on Thursday, Pantera Capital CEO Dan Morehead revealed that one in four initial coin offering (ICO) projects the firm has invested in could be considered as securities under U.S. regulations.

Morehead wrote:

“While we believe the vast majority of the projects in our portfolio should not be affected, approximately 25 percent of our fund’s capital is invested in projects with liquid tokens that sold to U.S. investors without using regulation D or regulation S. If any of these projects are deemed to be securities, the SEC’s position could adversely affect them. Of these projects, about a third (approximately 10 percent of the portfolio) are live and functional and, while they could technically continue without further development, ending development would hinder their progress.”

Are Pantera’s Crypto Investments Affected?

In April, Bloomberg reported that Pantera Capital had over $1 billion in its fund as the first official billion-dollar hedge fund in the cryptocurrency market.

At the time, on Bloomberg Television Thursday, Morehead disclosed that the firm’s single largest investment was ICON, South Korea’s largest blockchain project, and that it has roughly 10 percent of its capital invested in Bitcoin (BTC).

Since January, however, the value of ICO projects and tokens has declined substantially. ICON, which has been working with the government of Seoul to utilize the blockchain in various government-supported systems, saw a drop from $4.4 billion at its peak to $89 million, by 98 percent.

The value of most ICO projects and blockchain networks has declined by the range of 95 to 99 percent against the U.S. dollar in the past 12 months, mostly due to increasing regulatory pressure from the U.S. Securities and Exchange Commission (SEC) and the struggle of decentralized applications (dApps) to drive mainstream adoption.

One of the ICO projects Pantera invested in, Paragon, already reached a settlement with the SEC on November 16, as the first case of SEC registration charge settlement in crypto. Paragon was requested to register its token as a security, pay penalties, and file periodic reports with the SEC.

At the time, Stephanie Avakian, the co-director of the SEC’s Enforcement Division, said:

“We have made it clear that companies that issue securities through ICOs are required to comply with existing statutes and rules governing the registration of securities. These cases tell those who are considering taking similar actions that we continue to be on the lookout for violations of the federal securities laws with respect to digital assets.”

As SEC co-director Avakian emphasized, ICOs are required to comply with existing regulations, and several ICOs have gone through the appropriate steps to ensure its compliance with U.S. regulations.

The ERC20 tokens listed by Coinbase are generally considered to be non-securities given the exchange’s statement published in May that explicitly described its intent to only list crypto assets that are compliant with existing regulations.

Pantera Capital’s analysis of its own investments also demonstrates the possibility of segregating security tokens to non-security tokens with the guideline the SEC has provided earlier this year.

Shifting Trend

The ICO market has experienced a steep decline in demand, interest, and volume, all the while international government agencies crack down on projects for raising money through token sales.

With Japan and South Korea’s plans to restrict ICOs to accredited and institutional investors, the next chapter of the ICO sector could be institutionalization, as projects shift away from targeting retail investors in the public market to avoid any conflict with the U.S. SEC.

Featured image from Flickr/TechCrunch

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