The environment for initial coin offerings (ICOs) in the US has changed dramatically in the past few months. In July of 2017, the Securities and Exchange Commission (SEC) issued the DAO report that identified the token offering as a security indicating at least some of the hundreds of ICOs were deemed to be regulated.
In the ensuing months, the regulatory rhetoric has increased with SEC Chairman Jay Clayton stating he has yet to see an ICO that was not a security. Reports now abound about more aggressive regulatory actions against ICO issuers that may have sold unregistered securities. But money and people are free to move around and some of the more recent ICOs are ostensibly domiciled outside the US. Also, there are jurisdictions like Gibraltar and Switzerland that want to establish a regulatory framework that embraces digital assets and encourages cryptocurrency innovation.
So if you are considering an ICO does it make sense to consider “offshoring” your crowdsale?
Crowdfund Insider reached out to Dror Futter, a partner at the law firm of Rîmon based in New Jersey. Futter’s practice is mainly with startup companies and their investors having worked with a wide range of tech firms. But Futter is very well known in the cryptocurrency space where he advises clients on legal developments in regards to Blockchain and ICOs. Recently, Futter worked with the FT to share his insight into this fast growing sector of finance for the FT Guide to help advisers understand cryptocurrency and Blockchain.
We posed a series of questions to Futter about hosting a token sale outside the US. His responses are published below.
We are seeing more ICOs “offshore” their token crowdsales. What are the benefits of doing this?
Dror Futter: The regulatory uncertainty in the US, coupled by very clear statements from the SEC that they are closely watching this space, have led some to conclude that it is too risky to sell to US investors. This of course assumes that other countries are more ICO friendly, an assumption that is narrowing as more countries issue guidance that is not all that different from the SEC’s positions to date.
What about the risks? The Feds have already pursued some issuers that ostensibly were based in other jurisdictions.
Dror Futter: It is difficult to keep an offering from “bleeding” into the US either because the buyers are US persons or marketing efforts are deemed to have targeted the US. This is a federal and state concern. For example, regulators in Massachusetts came after someone who formed a Cayman entity to do his ICO but lives in Brookline, Massachusetts. At least 2 Americans bought his token and regulators maintain that it demonstrates that the safeguards he took to limit US participation were insufficient.
Gibraltar and other locations have targeted ICOs as an area of growth. What are they doing differently?
Dror Futter: Recently, we saw Switzerland issue guidance on ICOs as they outlined the three different types of tokens. Will this help clarify token offerings in Switzerland? The FINMA guidelines actually mention a fourth category of a hybrid token which is a mix of a utility token and what they call an asset token and we would call a security token. Hybrid tokens are considered securities. Putting aside terminology differences, I think this puts them right back to where the SEC is. Even if your token has utility, it can still be a security. The dividing lines remain unclear.
The real test is whether there is an ICO that people would have considered a utility token before that they now consider a security, or vice versa. I don’t think the guidance is sufficiently detailed to have that result.
As a result, I don’t think it has moved the needle on clarification. To the extent that Switzerland has had a reputation of being ICO-friendly, I think it indicates that they will end up looking a lot more like the US than people thought.
What about the States? Another recent development is Wyoming pursuing a definition of utility tokens while removing state taxes for Bitcoin trading. Is this the start of a trend?
Dror Futter: States can look around and see the tremendous amount of activity in the space. There is real incentive to try to capture some of it. You have already seen about half a dozen other states passing blockchain related legislation. The impact will vary.
States can legislate securities sales that occur entirely in their boundaries. Unless your token purchasers all live in Wyoming, you still have to deal with federal securities laws. That said, the regulatory uncertainty at the federal level has created a bit of a vacuum so it is not surprising that enterprising states are trying to fill the gap and likely will continue to do so.
In your opinion, what does the US need to do to create a bright line regulatory approach to enable the sale of digital assets – including securities and utility tokens?
Dror Futter: Yes, I think this is very important.
The current regulatory uncertainty is having the perverse effect of lowering investor safety. In this environment, the more established / conservative players tend to sit on the sidelines until the playing field is clarified. That skews the field to issuers who are risk takers and, without commenting on any individual ICO, on balance raises the overall risk profile of ICOs.
There is still the question of how “bright” the bright line needs to be, but at a minimum issuers and investors need a better sense of the shape of the field.