Legal aspects of the ICOs. What every founder should know

For the past two years, ICOs or TGEs ( Token generation events) were treated like crowdfunding events similar to the ones that take place on Kickstarter or Indiegogo. Nobody cared much about regulations, and even when governments started taking a closer look at crypto companies, most declared their tokens a “ utility” and not a security, which they believe should provide anti-regulatory immunity.

In reality proclaiming your crypto token a utility does not work as a proof against its security nature.

We have interviewed some of the lawyers that gave us some interesting materials to ponder and debank popular legal myths around ICO.

Myth #1. SEC is the only organization that can start ICO investigation

That is not true.
There is a Financial Crimes Enforcement Network (FinCEN) a bureau of the United States Department of the Treasury that collects and analyzes information about financial transactions in order to combat domestic and international money laundering, terrorist financing, and other financial crimes. They look at tokens as currency.
Then there is IRS that by default treats coins as a security and is actually the enforcement arm of Fincen

Currency and securities are not the same thing they are mutually exclusive. Currencies are money that you exchange immediately for goods and services, while securities are speculative. Fincen came out with a rule that says that now if you are going to be issuing any crypto you have to register as a money transmitter which is a very complex process.

So we see that Fincen and the IRS who work in the same department and have completely different views of what crypto is.

And finally there is SEC who by default treats all tokens as a security bacause that's their framework.

Myth #2. We clearly stated in our whitepaper that token is a utility and not a security.

It is very hard to have your token being not a security especially when the chairman of SEC saying he has not seen yet a token that was not a security, with BTC and Ether being an exception.
So the best advice we heard so far is treat your token as a security by default.
Also if the parameters below describe your token that there is a good chance it is not a security.

there is no trading of the token and no intentions to list it on exchange;
it is purely used as a utility within a given ecosystem and never leaves the platform;
there is no expectation/promise of gain,profit, dividends;
there is no speculation involved;

Based on these features we have not seen a token that did not make promises of exchange listings and prognosis of token price growth and once there are dealing with exchanges, then we are talking about the security. Let’s be honest here - most of the time people are acquiring tokens not in order to redeem them later within the platform but in order to get increased speculative value on an exchange. So by default, in order to have a clear picture of your ICO roadmap it is advised to treat your token as a security and act as it is one, unless you have a very good evidence that it is a utility token.

Myth#3 .Excluding US and some other countries will help avoid strict regulations.

Running KYC and excluding residents of certain jurisdictions does not guarantee that your token will not end up being sold to those that were not allowed to acquire tokens during ICO.
We’ve seen some exchanges asking company founders for a letter from US attorney, confirming that token is not a security. Though it does not look like letter from attorney will work as a valid proof of utility to regulators.

Myth#4. My ICO successfully ended several years ago, so I do not need to comply with current or future regulations.

Not true. There is no expiration date on the need to comply with law. So rushing thru your coin offering in order to avoid regulations will not work. There is an exchange under investigation that went out of business 4 years ago.

Another potential problem is that Class action lawyers will look for price drops and try to gather class of investors who have purchased your tokens and lost money and sue principles of your company. Under the securities law the principles of the company are jointly liable for the return of the money. Those charges are not dischargeable in bankruptcy as this a personal liability. LLC will not help when it comes to OPM ( other people's money)

So what can be done if you decided to treat your token as a security?

It is helpful to know a little bit about the history of financial regulations in the US. In 1929 when we had crash and a Great Depression there were no federal regulations regarding OPM ( Other People’s Money). In 1933 it was decided to open an agency called SEC that will regulate the financial sphere and People who were going to raise money from the public had to register their offering sale with the SEC and comply with all the disclosure requirement unless there was an exemption from the registration.

Fortunately , The Jumpstart Our Business Startups Act 2012, or JOBS Act, provides exemptions that allow to do a public offerings without registering it with SEC and most importantly without going with the costs of registration. JOBS act eliminates restrictions on general solicitation - so now you can do a public offering under regulation D for as long as you only sell tokens to accredited investors ( lot’s recent ICOs are actually open only to accredited investors)

To utilize exemption you will need to file a notice with SEC and verify that the investors are accredited. Verification requirement is not that challenging, there are services out there that can perform necessary checks.

It is important to understand that the US Government is not looking to ban crypto, it still wants to keep innovation in the US, create jobs and opportunities for companies to access capital market. They are bouncing that need with the need of protecting the investors. During 2016 - 2017 there were a lot of ICOs that just wanted to quickly raise money by calling their token the utility, as a result lots unaccredited investors lost money.

Hopefully regulations in this market will benefit both innovators and crowdsale participants and filter out potential scam out of the picture.

Disclaimer: We are not lawyers or a law firm and we do not provide legal or tax advice. None of our representatives are lawyers and they also do not provide legal or tax advice. The accuracy, completeness, adequacy or currency of the content is not warranted or guaranteed. Our services are not substitutes for the advice or services of an attorney. We recommend you consult a lawyer or other appropriate professional if you want legal or tax advice.

By Victoria Liset

https://bigbreak101.com/