On Tuesday, July 25, the SEC announced that Initial Coin Offerings, also called Token Sales, in many cases may be considered securities. Of course, this probably terrifies a large amount of the ICO community. So how do you actually legally raise an ICO?
Your first consideration should be whether you want to take U.S. investors. Many people seem to think that if they form the ICO in another country, they are not subject to U.S. laws. If only it were so! In truth, U.S. securities laws apply whenever someone is raising capital from a U.S. investor. It doesn’t matter if you are onshore or offshore–it only matters if you are going to include U.S. investors in the raise.
This all ultimately becomes a business decision. If you choose to include U.S. investors in your ICO event, you pay the price of adherence to U.S. securities laws. If you do choose to include U.S. investors on the ICO offering, the next question becomes what kinds of U.S. investors are you going to take funds from?
This boils down to two categories of people: rich people and non-rich people.
Limiting it to Rich People Only
Under Rule 506(c) of Regulation D, the SEC allows you to take as much money as you want from rich people only. There is no waiting period–you simply tell the SEC about your raise after the fact. You do, however, need to have proper legal paperwork. Because you are going to be openly advertising the ICO, the SEC requires you to take reasonable steps to verify that your investors are actually rich.
When I say “rich”, I’m talking about what the SEC thinks a rich person is. Their technical term for this is “accredited investor”–or a person with at least $1 million in net worth (excluding their primary residence), or with an annual income of at least $200,000. The investor will be required to prove to you that they meet this threshold.
Raising from Non-Rich People
- Raises up to $1 million
Under the relatively new Reg CF rules, ICOs can raise up to $1 million every 12 months from non-rich investors. In order to do so, however, the investor must file some paperwork, get their financials together, and find a registered funding portal or broker dealer that will list them.
Although not the strictest of the fundraising regulations, some issuers may still find this type of raise burdensome. This is because they will have to spend money on at least a financial professional and an attorney. Additionally, they will be subject to some annual reporting requirements and so should be okay with transparency.
- Raises up to $50 million
If $1 million isn’t quite enough, there is always Regulation A+, which allows a company to raise up to $50 million every twelve months from non-rich US investors. Many people call this regulation a “mini-IPO,” because the regulation requires more than the other rules, but falls short of registering a public offering.
Raising an ICO will cost some, and take a while. For example, if you conducting a Tier 2 Reg A+ offering ($20M+), you will be required to undergo an annual audit. You must also get your offering qualified with the SEC, which is a process that takes at least a couple of months. But, this regulation does allow you to get investments from the general public. Keep in mind that under both Reg CF and Reg A+, investors are limited in their investment amount based on a percentage of their annual income.
There is, of course, one other method: a concurrent offering. A concurrent offering is what SeedInvest calls a “side-by-side offering.” This pairs a Rule 506(c) offering alongside a Regulation CF offering and basically allows the company to raise up to $1 million from non-rich people and as much as they want from rich people.
Those are the basics that issuers considering an ICO should remember. Keep in mind that these rules only cover investments taken from U.S. investors and that an ICO must comply with the local laws of whatever other countries they are raising funds from.
Amy Wan, Esq.CIPP/US, is a Senior Contributor to Crowdfund Insider. Amy is founder and Chief Legal Hacker at Bootstrap Legal, a Legaltech and Fintech startup that is a software service that automates the drafting of complex legal documents for smaller real estate projects. Amy was previously a Partner at Trowbridge Sidoti LLP (CrowdfundingLawyers.net) where she practiced crowdfunding and syndication law. Formerly, she was General Counsel at Patch of Land, a real estate marketplace lending platform. While there, Amy pioneered the industry’s first payment dependent note that is secured pursuant to an indenture trustee and designed to be bankruptcy remote, and advised the company on its Series A funding round. In recognition her work at Patch, she was named as a Finalist for the Corporate Counsel of the Year Award 2015 by LA Business Journal. Amy also brings extensive experience in legal innovation and rethinking the delivery of legal services. She is the founder and co-organizer of Legal Hackers LA, and was named one of ten women to watch in legal technology by the American Bar Association Journal in 2014.