Zhao on Initial Coin Offerings and Extraterritorial Application of U.S. Securities Laws

Freya (Fangheng) Zhao (Georgetown University Law Center) has posted “Initial Coin Offerings and Extraterritorial Application of U.S. Securities Laws” (139 Banking L. J. 174 (2022) on SSRN. Here is the abstract:

Cryptocurrency transactions have grown exponentially since Satoshi Nakamoto published the Bitcoin White Paper on Halloween 2008. As of November 2021, the cryptocurrency market has transformed into an ecosystem with 14,710 tokens and $2.6 trillion market capitalization. The rise of initial coin offerings (“ICOs”) has been a major driver of the boom. Thousands of ICOs have raised billions of dollars since MasterCoin conducted the first reported ICO in 2013. Amid the boom, the Securities and Exchange Commission (“SEC”) has been grappling to apply the U.S. securities laws “extraterritorially” to regulate the ICOs, which are usually cross-border due to the inherent international nature of its underlying blockchain technology. The increasingly aggressive regulatory actions from the SEC have caused a massive flight of ICOs to offshore havens. In the first quarter of 2019, 86 ICOs specifically excluded U.S. investors.

However, these efforts to avoid the jurisdiction of the U.S. securities laws have mostly turned out to be futile. The SEC is not shy about reaching beyond the U.S. water’s edge to regulate offshore ICOs, as evidenced by its investigation of the DAO and the enforcement actions against PlexCorps, Block.one, Telegram, and Ripple. Class actions brought by investors against Tezos also suggested that the presumption against extraterritoriality is no panacea to prevent the application of the U.S. securities laws over offshore ICOs.

This article examines the extraterritorial application of the U.S. securities laws to regulate offshore ICOs. The first part of the article offers a brief introduction of the jurisprudence governing the extraterritoriality of the U.S. securities laws. The second part analyzes the application of the U.S. securities laws in proceedings against ICO issuers like PlexCorps, Tezos, Block.one, Telegram, and Ripple. The third part of this article summarizes the current legal framework of applying the U.S. securities laws to offshore ICOs and concludes that such a patchwork approach is a stopgap solution – expedient but imperfect. This article ends by discussing the potential future directions, including congressional legislation, international cooperation, a deferential substituted compliance approach, and adapting ICOs to existing registration exemptions.