SEC Regulation A may present an attractive financing option for issuers of "token" securities.  However, issuers should expect that the SEC will be closely monitoring activity in this space and will take swift action if it has concerns about potential investor harm.

The SEC's Divisions of Enforcement and Trading and Markets put forth a “Statement on Potentially Unlawful Online Platforms for Trading Digital Assets” regarding the legal ramifications of such platforms operating as “exchanges,” as defined by the federal securities laws.  Such a designation requires that the platform must register with the SEC as a national securities exchange or be exempt from registration -- practically meaning registration as an alternative trading system (“ATS”).  Each road to registration is fraught with its own pitfalls that need to be carefully examined but for those entities already in operation and potentially within the crosshairs of the SEC, the only viable business option is to try to register as an ATS.

On March 7, 2018, the SEC’s Enforcement Division and its Trading & Markets Division issued a joint “Statement on Potentially Unlawful Online Platforms for Trading Digital Assets.”[1]  The release appeared to be the strongest signal yet of a broadening of the SEC’s enforcement and regulatory interest beyond its focus since last year on the need for certain coin offerings to be registered or to qualify for an exemption as private placements.

While the SEC's Division of Corporate Finance has begun to explore ways to distinguish between utility tokens and securities, Arizona and Wyoming have already proposed legislation designed to provide a more definitive framework to ICO regulation.  The proposed legislation illustrates the trade-off that regulators are faced with: fostering the growth of the ICO market by providing clear-cut rules or ensuring investor protection by adopting a policy-driven approach that suffers from line-drawing problems.

Deep learning is another technological advance that has important implications for securities regulation.  In simple terms, deep learning is a form of machine learning that involves learning data representations and patterns using simulated neural networks.  Deep learning requires access to a very large amount of data and immense computing power.  I expect deep learning to be used by certain sophisticated traders, such as hedge funds and proprietary trading firms.

Two developments in technology, blockchain and deep learning, have implications for securities trading regulation.  The two technologies are different in scope and purpose and will raise different issues for securities regulators.  Both demonstrate how technological advances in the trading area can outpace current rules and regulations and cause regulators to rethink how to handle so-called “disruptive” technologies without impeding new structures and ideas.