The Corporate Law Group

OK. ICOs.

Are ICOs securities offerings? Wrong question.

When something new comes along, people frequently wring their hands and wonder where it will fit into the ecosystem they know. Sometimes it seems like the new thing has upended that ecosystem and things will never be the same. Sometimes they’re right. It may seem that way with ICOs, but it needn’t be. It isn’t that complicated.

We assume most readers know that ICOs are, “Initial Coin Offerings,” a rather clumsy and unfortunately name that evokes images of IPOs, including Lamborghinis and mansions. ICOs involve offering digital, “tokens”. The same technology that drives crypto currencies like bitcoin. The token usually represents a digital key to do something. With bitcoin, users hold and trade, ‘value’. Well, value to the extent that someone else thinks it has value. A fiat currency like our dollar bill.

So, the question of the day is, “Are ICOs securities offerings?” But, as stated above, that is the wrong question. The real question is, “What is your token used for? What is it good for?” Here are some guidelines:

1. In your vision, will your token increase in value due to the hard work you do in building your company? If so, it is absolutely a security.

2. Or can your token be traded in for a physical item, like a video game or an apple? If so it is a utility token and absolutely not a security.

3. The SEC says on its website, “ICOs, based on specific facts, may be securities offerings, and fall under the SEC’s jurisdiction of enforcing federal securities laws.” What useful things do we learn from this:
a. That ICOS may not be securities offerings.
b. That non-securities offerings do not fall under the SEC’s jurisdiction.

4. The SEC also makes clear that using the word “utility” does not determine whether or not the token is actually a utility token.

5. Must you comply with securities laws in selling tokens? Not if they are utility tokens. Just like you don’t need a medical license to put on a band aid, you don’t need to comply with SEC laws if not doing anything involving securities.

6. “But,” you say, “The SEC seems to want to regulate everything?” Not really; they are just really good at seeing through the multiple smokescreens thrown up by lazy and dishonest people selling securities.

7. “But everybody says that you can’t sell utility token in the US anymore.” Well, they’re wrong.

8. “OK, what is a security?” you ask. Good question. It is an (i) investment (of value), (ii) in a common enterprise (pooling of money), (iii) with an expectation of profit (increased value), (iv) solely from the efforts of others (not something controlled by you). That is a summary and you can unpack a lot from that, but that definition works pretty well.

9. Because a lot of tokens involved selling ‘securities’, now platforms intending to trade those securities are waiting for private placement holding periods to lapse before resuming trading.

Have other questions? Ask us!

Some resources, all from the horse’s mouth, so to speak:

https://www.sec.gov/ICO

https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11

https://www.sec.gov/news/public-statement/enforcement-tm-statement-potentially-unlawful-online-platforms-trading

https://www.sec.gov/news/public-statement/statement-potentially-unlawful-promotion-icos

https://www.sec.gov/news/press-release/2018-53

https://www.sec.gov/litigation/investreport/34-81207.pdf