October 2, 2017

ICOs: SEC’s Chief Accountant on Financial Reporting Issues

In a recent speech, SEC Chief Accountant Wes Bricker highlighted some of the financial reporting issues associated with initial coin offerings. His remarks addressed matters that should be considered by both issuers & investors in coin offerings.

For issuers, Wes cited the need to consider the application of GAAP guidance addressing questions such as:

– What are the necessary financial statement filing requirements?
– Are there liabilities requiring recognition or disclosure?
– Are there previously recognized assets that require de-recognition?
– Are there revenues or expenses requiring recognition or deferral?
– Is there a transaction with owners, resulting in debt or equity classification and possibly compensation expense?
– Are there implications for the provision for income taxes?

For coin investors, Wes noted the following topics for consideration:

– Does specialized accounting guidance (such as for investment companies) apply to the holder’s financial statement presentation?
– What are the characteristics of the coin or token in considering whether, how, and at what value the transaction should affect the holder’s financial statements?
– What is the nature of the holder’s involvement in considering whether the issuer’s activities should be consolidated or accounted for under the equity method?

Bricker’s remarks came at the end of a tough week for ICOs – China’s central bank announced an outright ban on them – and are another reminder that the SEC is watching, and expects companies involved in these deals to comply fully with applicable securities laws.

On a related note, the SEC issued an “Investor Alert” in late August about scams involving companies making claims about being involved in ICOs. And on Friday, the SEC busted a few of the scams.

ICOs: Get Ready for the Lawsuits

Money has been pouring in to ICOs – about $1.3 billion has reportedly been raised during 2017 alone – and a lot of that funding has been provided by unsophisticated investors, unaccompanied by regulatory scrutiny (until recently).  This Bloomberg article says that’s a recipe for a wave of private litigation:

The soaring valuations of new tokens and the major blockchain technologies underlying them, such as Bitcoin and Ethereum, have drawn new investors that may not understand how the tokens work, could lose money, and may not know how to recognize whether the tokens should be valued as a security, cryptocurrency, or utility.

Those factors are attracting bad actors and artificially driving up valuations of some assets that, once deflated, are likely to spur private litigation against companies and individuals issuing and exchanging these tokens, attorneys and research groups said.

According to the article, 3 lawsuits involving ICOs have already been filed – although none involve claims against issuers or exchanges on which the tokens trade.

Blockchain: Sorry Delaware, Nevada & Arizona Got There First

Of course, we wouldn’t be talking about ICOs and cyptocurrencies without blockchain – the distributed ledger technology that makes them possible. Delaware’s recent legislation allowing blockchain to be used for corporate recordkeeping has been hailed as cutting edge – with one nitwit even going so far as to say that Delaware’s actions “opened the door” for the use of blockchain in this fashion.

This recent blog from Keith Bishop says “not so fast” – sorry Delaware, it’s Nevada & Arizona that opened the door:

Delaware, which prides itself as a leader in corporate law, was not the first state to enact legislation authorizing blockchain technology, however. Nevada beat the Blue Hen State to the punch by over a month when Governor Brian Sandoval signed SB398 into law on June 5, 2017. Nevada’s legislation, unlike Delaware’s, does not amend Chapter 78, Nevada’s Private Corporation Law. Nevada chose instead to amend Chapter 719, which is its version of the Uniform Electronic Transactions Act. In this respect, Nevada follows Arizona which enacted amendments to its “Electronic Transactions Act” in March of this year (HB 2517)

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John Jenkins