Circle Internet Financial, the entity behind the second-largest stablecoin USDC, is considering going public through an Initial Public Offering (IPO). However, the U.S. Securities and Exchange Commission (SEC) has raised concerns that could test Circle's ambitious plans.

According to documents cited by Barron, the SEC's Division of Corporation Finance has been in correspondence with Circle for nearly a year, scrutinizing various aspects of USDC.

Regulatory Concerns

The SEC has requested Circle disclose the risks associated with USDC potentially being classified as a security. This classification would subject Circle to more stringent regulatory requirements.

The Commission also questioned whether Circle should be considered an investment company, which would necessitate a different registration process.

If USDC is deemed a security, Circle would face increased costs and regulatory obligations. Registering USDC and potentially complying with investment company regulations would make Circle more expensive to operate. Moreover, this could limit the types of businesses transacting in USDC.

Investment Company Implications

Being classified as an investment company would mean closer SEC oversight for Circle. This includes requirements to file holding reports and adhere to specific operational limits not applicable to regular operating companies.

Todd Phillips, a law professor at Georgia State University, told Barron's, "If these things are securities, it becomes more expensive for Circle to operate if they even can operate."

Previous IPO Attempt

Circle's IPO plan, disclosed earlier this year, marks the company's second attempt to go public. Its initial bid in 2022 was unsuccessful due to SEC scrutiny. The company has stated that the IPO will proceed after the SEC completes its review, subject to market conditions and other factors.

Broader Implications for Stablecoins

The regulatory scrutiny isn't limited to USDC alone. Other stablecoins like PayPal's PYUSD and Ripple's upcoming stablecoin, Ripple USD (RLUSD), are also under the SEC's radar.

PayPal disclosed that it received a subpoena from the SEC last November requesting documents related to PYUSD. Ripple aims to launch its stablecoin on XRPL and Ethereum, but the SEC has already flagged potential securities law violations.

In a September court filing, Circle argued that stablecoins like USDC are not securities because purchasers do not expect profits and payment stablecoins lack the "features of an investment contract."

Coinbase, a prominent backer of Circle, also maintains that USDC is not a security. Interestingly, the SEC's recent lawsuit against Coinbase, which involved 13 unregistered securities, did not include USDC.

The outcome of the SEC's review will significantly impact Circle's IPO and the broader stablecoin market. The industry is closely watching how these regulatory challenges will unfold.