On September 11, 2017, SEC Chief Accountant Wesley Bricker gave a speech at the AICPA National Conference on Banks & Savings Institutions titled “Advancing High-Quality Financial Reporting in Our Financial and Capital Markets.”  Mr. Bricker dedicated a portion of the speech to discussing the importance of broker-dealer compliance, as well as regulatory and financial reporting requirements, relating to initial coin offerings (ICOs), also referred to as token sales.  Mr. Bricker noted that in July 2017, the SEC issued a report on its investigation of an offering of digital tokens by The DAO, an unincorporated virtual organization.  Mr. Bricker emphasized that, as stated in the SEC’s report, the federal securities laws apply to those who offer and sell securities in the United States, regardless of whether the issuing entity is a traditional company or a decentralized autonomous organization, whether those securities are purchased using U.S. dollars or virtual currencies, or whether they are distributed in certificated form or through distributed ledger technology.  Mr. Bricker stated that an entity involved in initial coin or token offering activities must consider the necessary accounting, disclosure and reporting guidance based on the nature of its involvement, including the preparation of financial statements.  Mr. Bricker noted that issuers involved in initial coin or token offerings should consider, for example, the application of SEC guidance in addressing the following questions:

  • What are the necessary financial statement filing requirements?
  • Are there liabilities requiring recognition or disclosure?
  • Are there previously recognized assets that require de-recognition?
  • Are there revenues or expenses requiring recognition or deferral?
  • Is there a transaction with owners, resulting in debt or equity classification and possibly compensation expense?
  • Are there implications for the provision for income taxes?

Mr. Bricker also noted that holders of coins or tokens should consider, for example, the application of SEC guidance in addressing the following questions:

  • Does specialized accounting guidance (such as for investment companies) apply to the holder’s financial statement presentation?
  • What are the characteristics of the coin or token in considering whether, how, and at what value the transaction should affect the holder’s financial statements?
  • What is the nature of the holder’s involvement in considering whether the issuer’s activities should be consolidated or accounted for under the equity method?

A copy of the speech is available at: https://www.sec.gov/news/speech/speech-bricker-2017-09-011.