As I have previously noted (most recently here), the SEC recently has stepped up its regulatory efforts to police the burgeoning Initial Coin Offering (ICO) market, as well as cryptocurrencies generally. Now it appears that the federal regulators are not going to be the only ones to get in on the act. U.S. state regulators have recently stepped forward to assert their concerns and their authority as well, and at least one state regulator is backing the words up with action.


The January 4, 2018 NASAA Statement

The North American Securities Administrators Association (NASAA) is the national voluntary membership association of the securities regulatory authorities in the 50 states, the District of Columbia, Puerto Rico, and the U.S. territories, as well as the provincial and territorial authorities in Canada and Mexico.


On January 4, 2018, the NASAA issued a statement captioned “NASAA Reminds Investors to Approach Cryptocurrencies, Initial Coin Offerings and Other Cryptocurrency-Related Investment Products with Caution” (here). The statement “reminds” Main Street investors “to be cautious about investments involving cryptocurrencies.” Joseph Borg, NASAA president and director of the Alabama Securities Commission, is quoted in the statement as saying that investors should go beyond the “headlines and hype” to learn about risks associated with these investments.


The statement notes that the wild price fluctuations “can easily tempt unsuspecting investors to rush into an investment they may not fully understand.” The statement adds that “Cryptocurrencies and investments tied to them are high-risk products with an unproven track record and high price volatility. Combined with a high risk of fraud, investing in cryptocurrencies is not for the faint of heart.”


The NASAA statement reports on a NASAA survey of state and provincial securities regulators which showed that 94 percent believe there is a “high risk of fraud” involving cryptocurrencies. According to the survey, regulators also were unanimous in their view that more regulation is needed for cryptocurrency to provide greater investor protection. The NASAA statement also reports that it has identified Initial Coin Offerings (ICOs) and cryptocurrency-related investment products as emerging investor threats for 2018.


The NASAA includes common investor concerns about cryptocurrencies and ICOs, including the frequent   lack of regulatory oversight and the high volatility of cryptocurrencies prices and valuations, as well as the vulnerability of cryptocurrencies to hacking and data theft. The report also notes common cryptocurrency “red flags,” including guaranteed high rates of return, excessive or exaggerated claims, and pressure to buy.


The SEC’s Companion Statement

The SEC also issued its own press release on January 4, 2018, in support of the NASAA statement. The SEC press release provides a Statement of Chairman Jay Clayton and Commissioners Kara M. Stein and Michael S. Piwowar in support of the NASAA statement, noting that “The release recognizes that cryptocurrencies, while touted as replacements for traditional currencies, lack many important characteristics of traditional currencies, including sovereign backing and responsibility, and now are being promoted more as investment opportunities than efficient mediums for exchange.” The SEC press release also


[R]eminds investors that when they are offered and sold securities they are entitled to the benefits of state and federal securities laws, and that sellers and other market participants must follow these laws. Unfortunately, it is clear that many promoters of ICOs and others participating in the cryptocurrency-related investment markets are not following these laws. The SEC and state securities regulators are pursuing violations, but we again caution you that, if you lose money, there is a substantial risk that our efforts will not result in a recovery of your investment.


The Texas Securities Regulators Cryptocurrency-Related Cease and Desist Orders

The state securities regulators are not just issuing statements. For example, on January 4, 2018, the Texas securities regulator issued an Emergency Cease and Desist Order (here), ordering U.K. cryptocurrency marketplace BitConnect to halt operations. The order says that the marketplace was improperly offering to trade in securities that were not but that should have been registered, while at the same time promising inflated or unrealistic rates of return. The Texas State Securities Board’s (TSSB) January 4, 2018 press release about the cease and desist order can be found here.


The Order alleges that the company had engaged in “fraud” in connection with the offer of various investments in the marketplace. At the same time, the Order alleges that the company has disclosed “virtually nothing” about its principals, financial condition, or strategies for earning profits for investors.


The BitConnect order is the second such action that the Texas securities regulator has issued. As discussed in a December 20, 2017 TSSB press release (here), the TSSB previously issued an Emergency Cease and Desist Order (here) against USI-Tech Limited, a Dubai-based Bitcoin mining firm that, through sales agents based in or acting in Texas, allegedly was “promising low-risk, triple-digit returns from investments tied to Bitcoin mining.”



The SEC has already made it clear that it intends to crack down on ICOs that are not in compliance with legal requirements or that otherwise threaten injury to investors. The state regulators have now made it clear they intend to step up as well. Indeed, the Texas regulator’s actions make it clear that the state securities regulators are prepared to take action, adding to the regulatory threats that the ICO companies and cryptocurrency-related companies face. In the words of a January 5, 2018 article, the Texas regulator’s actions represent “the tip of the spear,” and the NASAA’s statement underscores the fact that state regulators are prepared to step into the fray when they feel they must take action to protect investors in their respective jurisdictions.