What’s Next For Token Sales & ICOs After the SEC’s Recent Warnings


Disclaimer: Although I am a securities attorney, I am not your securities attorney, so the following is in no way legal advice. If you are thinking about doing an ICO or token sale, I highly recommend talking to and hiring your own attorney.

If you’ve been following ICOs (initial coin offerings) and token sales as closely as I have, then you’re probably well aware of the SEC’s recent announcement that coins and tokens sold to investors could very well be considered “securities” and are potentially being sold in violation of US Federal Securities Laws. Many of my colleagues have already thoroughly discussed the issue of whether coins and tokens count as “securities”, some of which came prior to the SEC’s recent announcement, so I’ll save the “I told you so’s” for them.

Now that the SEC has explicitly stated what everyone in the industry already knew, what’s next for companies thinking about doing their own ICOs and token sales? Well, you really only have two options, either you ignore the SEC and keep selling tokens in possible violation of federal law or simply follow the rules.

Assuming you’re not a scam artist trying to capitalize on the ICO craze, and believe me there are a ton out there doing so, you’ll probably want to go with option two (if you are a scam artist, feel free to close the page now). So how can you have a successful but legally compliant ICO or token sale? There are only really three ways you can do so.

Avoid SEC Jurisdiction

Your first option is to have an ICO that falls outside of the jurisdiction of the SEC.

What does that mean? Simple: don’t sell coins or tokens to US citizens. A lot of companies doing token sales and ICOs are already doing this because they already know as long as you don’t sell “securities” to US citizens, the SEC generally doesn’t care. Don’t be confused though, just because a company is headquartered and incorporated outside of the US doesn’t mean they’ll be free from US regulations. I’ve seen a few ICOs make this mistake. Even if your company is organized outside the US but you sell “securities” to US citizens, the SEC will still come down on you if you violate federal securities laws.

Assuming your company is organized in a foreign country and prohibits US citizens from taking part in your ICO, you probably don’t need to worry about the SEC. Now whether or not your ICO will violate another country’s securities laws, that will depend on the particular country(ies) your company is based in and to whom you are selling coins. YMMV so consult an attorney in your particular country.

Apply for an Exemption

What if you want to have an ICO that includes US citizens?

Well that means you’ll have to follow US regulations and, assuming your coins count as “securities”, you’ll either have to register those securities (i.e. become a publicly traded company or other reporting company) or sell those securities under some exemption to federal securities laws. Becoming a public company is pretty expensive so that is most likely out of the question for most start ups that are even thinking about doing an ICO. That leaves you with filing for an exemption.

Luckily for you, there are plenty of exemptions which you could qualify for. There are exemptions under Regulation D, Regulation A (and A+), Regulation Crowdfunding (aka Reg CF), as well as a host of intrastate exemptions (that means selling only in one state).

Each has its share of benefits and drawbacks however. For example, Reg D offerings are generally limited to “accredited investors” only (i.e. rich people), Reg A has a cap on how much each investor can invest and costs more than the others (it’s like a mini-IPO), and Reg CF is capped at $1 million (given that most ICOs raise multiples of that easily, it probably doesn’t make sense to do a Reg CF). Which exemption is right for your ICO will depend on your individual circumstances and goals, but it may be the best option if you want to do your ICO in the US and don’t want to violate federal securities laws.

Don’t Sell “Securities”

The last option would be to simply make sure the coins/tokens you are selling do not count as “securities”.

If you’re not familiar with what counts as a security, there are tons of articles out there that discuss the topic ad nauseam (just search the“Howey Test”) so I won’t bore you with the details here. Basically, if you’re selling coins/tokens to investors and the investors are buying these coins because they expect to make a profit from the coins increasing in value along with your company’s value increasing, the coins are probably securities.

What does that leave you with if you have to sell coins to people who don’t expect to make a profit from the coin itself?

The coin has to have value that is tied to something besides the overall value of your company. An example would be a coin that is used and spent in your app and only in your app (i.e. the fuel that powers your app). Buyers of the coin understand that they can’t freely trade the coin in outside markets and can only spend the coin as a kind a digital fuel. In that case, the coin would probably not be a “security”.

The Howey Test is extremely fact based and will depend on the individual circumstances of each case so there could be many other scenarios out that where a coin won’t be considered a “security”. I’m sure if you do some Googling, you’ll find plenty of other real world examples.

Again, if you’re not sure whether your ICO would count as a securities offering, consult an attorney!

What Does It Matter?

All of this could be flipped around to the perspective of a potential investor in an ICO as well. If you’re thinking about buying a company’s coin or token, you should ask yourself first whether you’re buying it as an investment. If so, then ask whether this company is selling their coins to US citizens. If yes to that, then ask whether the company is doing so in violation of US Securities Regulations. If you think they are, then that’s a huge red flag and you should probably be extremely cautious of what the company is telling you (heads up, they’re probably trying to scam you).

Overall, I really don’t think the SEC’s recent announcement is going to affect the ICO market in any meaningful way for the time being. They didn’t tell us anything we already didn’t know.

Companies that are smart and did their research before having an ICO probably already knew everything I just laid out. Companies that didn’t were probably just trying to make a quick buck anyway.

I don’t see that trend changing anytime soon. Scammers gonna scam, so it’s up to the individual investors to be smarter, look past the hype in an ICO and determine whether a particular coin is worth it.

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