SEC warns public on risks of investing in virtual currencies

The Securities and Exchange Commission (SEC) has warned the investing public against dealing with unregistered securities, citing the emergence of initial coin offering (ICO) of companies selling virtual currencies.

In an advisory issued on Tuesday, the SEC urged the public “to be vigilant when investing in this kind of activity and to take the necessary precautions in dealing with ICO entities.”

The SEC also warned those who invite or recruit other people to join or invest in unregistered investment contracts or securities that they may be held criminally liable or penalized in accordance with the Supreme Court decision in the case of SEC vs. Oudine Santos (G.R. No. 195542, March 19, 2014).

The advisory was issued following reports that certain companies, individuals or groups of persons were enticing the public, either through popular social media platforms or through their own independent websites, to participate in so-called “initial coin offerings” and to purchase the corresponding “virtual currency.” It was earlier reported that the SEC, for instance, was investigating the ICO of Krops, an online marketplace for farm produce led by controversial businessman Joseph Calata.

Virtual currency refers to a digital representation of value issued and controlled by its developers and used and accepted among the members of a specific community or users.

ICO is the first sale and issuance of a new virtual currency to the public usually for the purpose of raising capital for start-up companies or funding independent projects. In an ICO campaign, a percentage of the total available virtual currency is sold to interested buyers in exchange for any of the following: Actual currency, another virtual currency or another asset or security.

“Based on the information gathered by the Commission, some of these new virtual currencies, based on the facts and circumstances surrounding their issuance, follow the nature of a security as defined by Section 3.1 of the Securities Regulation Code (SRC). However, unlike ordinary securities, these virtual currencies are neither guaranteed by any central bank nor backed by any commodity,” the SEC said.

Under Section 3.1(b) of the SRC, a security includes an “investment contract”. An investment contract is defined as a transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits primarily from the efforts of others. An investment contract is presumed to exist whenever a person seeks to use the money or property of others on the promise of profits.

“When a virtual currency is likewise analogous to any of the types of securities under Section 3.1 of the SRC, there is a strong possibility that the said virtual currency is a security under the jurisdiction of the SEC and has to be registered and necessary disclosures have to be made for the protection of the investing public,” the SEC said.

Where the scheme involves the sale of securities to the public, the SRC requires that these securities offered are duly registered and that the appropriate license and permit to sell securities to the public are issued to the corporation and its agents, pursuant to the provisions of Section 8 and 28 of the SRC.