September 28, 2017

Two months after its Investor Bulletin stating that U.S. securities laws may apply to digital token sales, the Securities Exchange Commission (“SEC”) announced Monday two new initiatives to address cyber-based threats and protect retail investors.  The SEC’s press release outlined the creation of the Cyber Unit (“Unit”) and the Retail Strategy Task Force (“RSTF”).

According to the press release, the Unit has been in the planning stages for months, and will focus the Enforcement Division’s substantial cyber-related expertise on targeting cyber-related misconduct, including:

  • Market manipulation schemes involving false information spread through electronic and social media
  • Hacking to obtain material nonpublic information
  • Violations involving distributed ledger technology and initial coin offerings
  • Misconduct perpetrated using the dark web
  • Intrusions into retail brokerage accounts
  • Cyber-related threats to trading platforms and other critical market infrastructure

The Unit seeks to implement an internal cybersecurity risk profile and create a cybersecurity working group in order to enhance the SEC’s ability to detect and investigate cyber threats. The Unit will coordinate information sharing, risk monitoring, and incident response efforts within the SEC. The Unit will be led by Robert A. Cohen, the former co-chief of the SEC’s Market Abuse Unit.Additionally, the RSTF has been established to “develop proactive, targeted initiatives to identify misconduct impacting retail investors.” Using lessons learned from previous cases involving fraud targeting retail investors, along with leveraging data analytics and technology, the RSTF intends to identify large-scale misconduct affecting retail investors.While the stated objective of the RSTF does not specifically mention distributed ledger technology or initial coin offerings, the proliferation of such offerings is likely to draw the attention of the RSTF, specifically for those coins or tokens that would be deemed investment contracts under the “Howey Test,” and that may be considered “securities” for regulatory purposes.

We expect the regulatory scrutiny to continue to increase within the crypto token markets. When considering undertaking an initial coin offering or investing in a crypto token or coin, it is important to conduct appropriate due diligence.  Please review Reed Smith’s Client Alerts regarding the jurisdiction of the SEC over initial coin offerings (, and the CFTC’s enforcement action over fraudulent bitcoin trading (