On March 7, 2018, the Securities and Exchange Commission (SEC) issued a public statement regarding the risk posed by online platforms that allow trading in digital assets to violate federal securities laws. This statement indicates that the SEC is increasing its focus on platforms that offer such trading and their compliance with applicable securities laws.
Although the SEC recognizes the benefits to investors of using these platforms, there is a concern that some of these platforms may indeed be operating as “exchanges” under federal securities laws and are therefore improperly trading securities without registration or an exemption.
Considerations for Investors Using Online Trading Platforms
A major issue identified by the SEC is that many online trading platforms can easily be perceived by investors as being regulated by the SEC when they are in fact not. First, investors should be aware that even though a platform refers to itself as an “exchange,” this does not mean it is an SEC-registered securities exchange or otherwise meets the standards of the SEC. Furthermore, the SEC does not review the quality of the digital assets traded on the platforms, the standards used to pick these assets, the trading protocols used by the platforms or the integrity of the information provided to investors. As a result, prior to trading digital assets on an online platform, investors should consider the following questions:
- Do you trade securities on this platform? If so, is the platform registered as a national securities exchange?
- Does the platform operate as an alternative trading system ("ATS")? If so, is the ATS registered as a broker-dealer and has it filed a Form ATS with the SEC?
- Is there information in FINRA's BrokerCheck® about any individuals or firms operating the platform?
- How does the platform select digital assets for trading?
- Who can trade on the platform?
- What are the trading protocols?
- How are prices set on the platform?
- Are platform users treated equally?
- What are the platform's fees?
- How does the platform safeguard users' trading and personally identifying information?
- What are the platform's protections against cybersecurity threats, such as hacking or intrusions?
- What other services does the platform provide? Is the platform registered with the SEC for these services?
- Does the platform hold users' assets? If so, how are these assets safeguarded?
Considerations for Market Participants Operating Online Trading Platforms
Even if online trading platforms cannot be classified as “exchanges” under federal securities laws, these platforms should be aware that the services they offer may nonetheless trigger other registration requirements under the securities laws. For example, these platforms may be required to register as broker-dealers, transfer agents or clearing agencies depending on the specific services provided. Platforms are encouraged to consult with legal counsel to assist in making such determinations.
The new SEC statement can be found here.
KMK Law articles and blog posts are intended to bring attention to developments in the law and are not intended as legal advice for any particular client or any particular situation. The laws/regulations and interpretations thereof are evolving and subject to change. Although we will attempt to update articles/blog posts for material changes, the article/post may not reflect changes in laws/regulations or guidance issued after the date the article/post was published. Please consult with counsel of your choice regarding any specific questions you may have.
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Mark Reuter advocates for business clients in transactions, proceedings and conflicts regulated by federal and state securities laws and stock exchange rules. A partner in the firm’s Business Representation & Transaction ...
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