ICO’s (initial coin offerings) have become a popular method of raising funds, particularly for tech companies: the successes of Tezos and Bancor are two prime examples. These transactions offer investors securities in the form of digital currency utilizing certificates or blockchain technology. While much of the allure around ICO’s has been their lack of regulation, that allure may soon be lost. The SEC just released a report following their investigation of DAO Tokens (a quasi crowdfunding platform). Their report advises virtual issuers, that said “securities” may in fact be considered security transactions subject to federal securities laws. According to the report “issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies”. While DAO’s transactions were ultimately found to be in violation of securities laws, the SEC had decided not to file charges but rather to caution the industry. While the SEC acknowledges that such innovative advancements will continue to change and challenge the securities landscape, this report proves their continuous attention to (and expeditious efforts in) governing those technologies. The agency was also quick to alert investors that this same technology may be utilized to perpetrate new investment schemes.

Companies involved with such transactions should also be aware of the potential challenges when purchasing D&O insurance, namely difficulties placing coverage, regulatory challenges, and concerns over uncertainties regarding the policy’s “public offering” language (and qualification of exempt securities). While the regulation of ICO's is in an infant stage, companies seeking to raise funds through coin offerings should familiarize themselves with their D&O policy's wording. Moving forward, private company D&O policies may need to respond with additional policy language to provide clarity around their coverage for claims arising from said offerings. Additionally, these transactions may also result in increased accusations of fraud and pose potential cyber risks. With blockchain an entirely new technology, using such a platform for securities transactions poses considerable uncertainties and new opportunities for hackers. While bitcoin/blockchain have proven fairly secure and challenging for hackers, its not foolproof. The recent hack against Bitfinex, in which 70 Million worth of customer's bitcoins were stolen from a Hong Kong exchange effectively demonstrate the potential risk.