Something that might come into play is a phrase that I authored that goes something like this: Laws are written with intentional ambiguity unless they apply to you as a person, then they are quite clear and without vagueness”. When it comes to the legal method of running an ICO in the USA, this is probably an applicable statement.
First, what is an ICO? With the advent of cryptocurrencies such as Bitcoin and Ethereum that created what is known as “digital currency”, the concept of an Initial Coin Offering (ICO) came into being. Understand it is coined by private companies going public in what is known as an Initial Public Offering (IPO). However, that is about where the similarities stop.
ICO is basically a way to raise money for projects or products yet to be developed, with investors not getting shares of stocks but rather digital tokens or digital currency. The idea would be that the money raised from the “token” sale would be used for the research and development of a product not yet conceived or even brought to the market. From the investor’s point of view, it would be in the hopes that the token would increase in value as it is tied to this product. It is a speculative play.
There is no promise of a product, just the intent to create the product. From the initial investor’s point of view, cashing it out (i.e. selling the tokens to other investors) after the product comes into being, or even as the value of the tokens goes up during the companies research and development phase would be the end game.
Of course, the next question would be are these tokens than a currency, an asset or simply just used to buy the product only and have no other value. In addition, there is a question of whether the tokens themselves are considered a security in the eyes of the Securities and Exchange Commission (SEC) and require proper registration? This is where simple starts to become complex and where lawyers and the securities industry will have a say in the entire process.
It will appear that to stay legal in the ICO world without fear of being shut-down or regulated, there are three things to consider. All three are paramount in offering a legal ICO in the United States.
- Did the ICO register with the SEC in the way that IPO’s registered? This is called the traditional way.
- Are tokens being issued for product use only and therefore not truly an investment per se?
- Is there an actual product that is available before the ICO that the tokens can be valued or assessed to? If there is none, then it is very likely a security.
The issue here is that unlike an IPO, one is not actually buying shares of a company in an ICO. Investors are simply buying tokens for a product or yet to be realized a product, with no asset base value attached. It is no wonder the SEC has raised their eyebrows on this. In addition, ICO’s offer digital currency that is decentralized which further complicates the regulating of such transactions.
Do not try to go it alone as a company or group of individual’s with a great idea for a great product while thinking of raising an ICO as a means to create capital for your venture. There are other ways such as crowdfunding and private placement that now can include even non-accredited investors. This is not to say that an ICO is an option to stay away from, but rather just one of many options in raising capital.
You can start your research by going to the following blog medium.com entitled “How to hold an ICO in 2018 and Beyond”. In addition to this, one must consider why to invest in digital coins or tokens in the first place. From our perspective there are really only two good reasons:
- As an asset for investment that will have value because it has global value (people want to own it)
- As a means of de-centralized commerce to pay for goods and services. (This is yet to be realized on a large scale but the trends seem to be pointing in this direction internationally)
If you are a company desiring to offer an ICO to investors, it would be in your best interest to give the SEC a call and discuss with them your offering on a future product. Secondly, do your research and get legal advice from the legal profession on exactly how to go about this and how to set up the exchange. Make sure that your future product is a viable product or you have the product ready for production. Do not intentionally set up a scam! It is not worth it!
If you are an investor, do your due diligence on the company and the people offering the ICO. As digital currency is still in its infancy, and ICO are only starting to emerge, you have a high chance of losing money than making money. ICO is just like any other invention conceived by the human mind. There is minimal acceptance at first, but with higher potential returns. Once the herd catches on to it, the possibility of making a lot of money goes down. In this short article, we could not possibly give you all the ins and outs of holding an ICO as the variables are still moving. We also do not want to discourage you from holding an ICO.
There is what is known as the Simple Agreement for Future Tokens (SAFT) that most of the ICO’s have and are using. You will do well to be well versed and understand this procedure. In addition, you can also look at other ways of raising capital that is mentioned here:
- Regulation Crowdfunding (Reg. CF)
- Regulation D, Rule 506 (Reg. D)
- Regulation S (Reg. S)
- Regulation A+ (Reg. A)
Please understand that the information provided in this short article is accurate to our knowledge. We are not offering you legal or financial advice. Any legal or financial advice should come from the professionals in law and financial planning. We urge you to contact your own team of legal professionals.