The SEC’s probe significantly ratchets up the regulatory pressure on the multibillion-dollar U.S. market for raising funds in cryptocurrencies. Photo: Donnell, Ryan By Jean Eaglesham and Paul Vigna Updated Feb. 28, 2018 6:47 p.m. ET 3 COMMENTS The Securities and Exchange Commission has issued dozens of subpoenas and information requests to technology companies and advisers involved in the red-hot market for cryptocurrencies, according to people familiar with the matter. The sweeping probe significantly ratchets up the regulatory pressure on the multibillion-dollar U.S. market for raising funds in cryptocurrencies. It follows a series of warning shots from the top U.S. securities regulator suggesting that many token sales, or initial coin offerings, may be violating securities laws. Related Sales of New Digital Tokens Are Still Soaring (Feb. 22) Investors Warned of Cryptocurrency ‘Pump-and-Dump’ Schemes (Feb. 15) Opinion Column on Regulating Cryptocurrencies by the Heads of SEC, CFTC (Jan. 24) What’s an Initial Coin Offering? The wave of subpoenas includes demands for information about the structure for sales and pre-sales of the ICOs, which aren’t bound by the same rigorous rules that govern public offerings, according to the people familiar with the matter. Companies use coin offerings to raise money for everything from file-sharing technology to pet passports. A spokesman for the SEC declined to comment. U.S. regulators have repeatedly put cryptocurrency companies and their advisers on notice in recent months about what officials say are widespread violations of securities rules designed to protect investors. “Many promoters of ICOs and cryptocurrencies are not complying with our securities laws,” SEC chairman Jay Clayton said earlier this year. In another speech he said he has instructed his staff to be “on high alert for approaches to ICOs that may be contrary to the spirit” of those laws. Bitcoin vs. Regulators: Who Will Win? As bitcoin has emerged from the underground world of nerds and criminals to become a mainstream investment, the risk of hacks and scandals has also blossomed. What's a government to do? The WSJ's Steven Russolillo travels the world (sort of) to see how regulators are responding to the remarkable rise of cryptocurrencies. Video: Sharon Shi and Crystal Tai Such warnings have failed to chill the booming market for digital tokens. Coin offerings have already raised about $1.66 billion this year and are on pace to top last year’s $6.5 billion tally, according to research and data firm Token Report. “We’re seeing the tip of the iceberg … there is going to be a ton of enforcement activity,” said Dan Gallagher, an SEC commissioner from 2011 to 2015 who now sits on the board of blockchain company Symbiont. Mr. Gallagher told an SEC conference in Washington last week that the largely unregulated token offerings are “the freaking Wild West—it is ‘Wolf of Wall Street’ on steroids.” Many of the coin offerings happen outside the regulatory framework designed to protect investors. Hype around last year’s bitcoin bubble led to many cryptocurrency offerings for startup projects. Some of them had little, if any, basis in proven technologies or products, and many were being run outside the U.S. In some cases, investors caught up in schemes that turn out to be fraudulent may have little hope of recovering their money. A soon-to-be published MIT study of the ICO market estimates that $270 million to $317 million of the money raised by coin offerings has “likely gone to fraud or scams.” The SEC has so far brought only a handful of cases alleging cryptocurrency frauds, as officials have raced to keep pace with token sales in the last 18 months. In January, for instance, the SEC halted the coin offering of Dallas-based AriseBank, accusing the company and its executives of conducting a scam and misleading investors with claims it was buying a federally insured bank. The group claimed to have raised $600 million. A lawyer representing AriseBank didn’t immediately respond to a request for comment. Robert Cohen, head of the SEC’s cyberenforcement unit, last week said at least a dozen companies have put their offerings on hold after the agency raised questions. Many of the cryptocurrency-related subpoenas were issued in recent weeks, likely paving the way for what lawyers and industry insiders expect to be a dramatic upturn in enforcement activity. The SEC scrutiny is focused in part on “simple agreements for future tokens,” or SAFTs, which are used in some of the most prominent crypto-fundraisings, according to the people familiar with the matter. The agreements allow big investors and relatively well-off individuals to buy rights to tokens ahead of their sale. The rights can be traded, or flipped for profits, even before the sale begins. The SEC is concerned that such agreements are potentially being used to trade like securities without conforming to the strict rules that apply to securities. Telegram, a popular messaging app, used such an agreements earlier this year to raise an astounding $850 million from 81 investors, according to an SEC filing by the company. It isn’t clear if the SEC has issued any information requests or subpoenas related to the Telegram fundraising. A Telegram representative didn’t immediately respond to a request for comment. The Cardozo Law School in New York issued a report last year saying simple agreements for future tokens could increase the risk that certain coin offerings violate securities laws, as well as potentially damaging smaller investors. Some venture capitalists and lawyers are concerned a growing secondary market in presold tokens like Telegram may be damaging the cryptocurrency sector. “This feels like Wall St. It’s gross. It’s shady. It’s not what blockchain technology or ICOs were supposed to be about,” Jeremy Gardner, a co-founder of hedge fund Ausum Ventures, said in a tweet in February.