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Hire Experienced Cryptocurrency Team for ICOs
If you need help to launch your ICO, from SEC compliance issues to expert assistance in structuring your offering as a security or utility token, you need an ICO attorney.
ICOs resemble IPOs for stocks. They are public offerings for cryptocurrencies or digital currencies facilitated by blockchain technology. ICOs are great tools for raising capital. They are faster than traditional funding options, which explains why they are popular today.
However, ICOs can be extremely complex and risky when they are launched without expert help. Federal agencies like the SEC and DOJ are constantly investigating ICOs for potential wrongdoing like fraud and abuse.
Your business is at risk if you launch an ICO without proper due diligence and meeting all regulatory obligations. Don't put your reputation at risk of federal investigations, subpoenas, summons, and other federal agency demands that can quickly escalate to hefty penalties, injunctions, disgorgement orders, and jail time.
Before launching your ICO, take a proactive approach to everything from structure to regulatory compliance. Hire an ICO lawyer to prevent the above eventualities. At Blockchain Lawyer, we have lawyers and consultants with extensive training and experience in ICO matters.
We are up to date with all legal and regulatory issues affecting cryptocurrencies and blockchain tech as a whole in relation to ICOs. We know what agencies like the SEC look for in ICOs. We can assist you with SEC registration and work alongside SEC personnel to launch a compliant ICO. Our ICO attorneys can also craft ICO defense strategies to protect you from federal investigations. Don't wait for federal investigations. Contact us for a free ICO consultation and stay ahead of federal agency scrutiny.
Cryptocurrencies and Blockchain
Cryptos are digital assets. Besides being digital, they stand out from typical assets by being decentralized, which means a third party doesn't control them. Cryptos can operate perfectly without intermediaries like banks or governments. This is possible due to the peer-to-peer networks they run on.
Bitcoin is undoubtedly the first and most popular cryptocurrency. The crypto was created back in 2008 and launched in 2009 by Satoshi Nakamoto. The currency gained popularity quickly for its speed, low transaction fees, pseudonymity, and the absence of third parties like banks and government to control supply and transactions.
Bitcoin paved the way for many other cryptocurrencies (Altcoins). Popular altcoins today (alternative coins) include but aren't limited to Cardano, Ethereum, Bitcoin Cash, Monero, Stellar, and Litecoin.
Cryptocurrency transactions are possible because of blockchain technology – a decentralized ledger that is distributed across multiple computer nodes. Decentralization simply means that there is no governing body (banking or government). All transactions in a blockchain (or blocks) are linked to prior ones to form a chain (blockchain).
ICO (Initial Coin Offering)
Many companies and individuals today are using blockchain and peer-to-peer networks for launching their own initial coin offerings. ICOs are simply IPOs for cryptocurrencies. Their aim is to raise money without venture capitalists, angel investors, or other traditional means of getting funding. However, unlike IPOs, they don't require federal oversight.
However, launching an ICO makes you or your company a target for federal investigations from agencies like the SEC.
Why Is the SEC Concerned about ICOs?
Many ICOs are being launched irregularly. Since the SEC treats cryptocurrencies as securities, they are subject to securities regulations that require them to be registered with the SEC. Unless there is an applicable exemption, SEC registration is mandatory, and failure to register results in a federal investigation.
The SEC focuses on unregistered ICOs since there is a high risk of fraud, among other wrongdoing like market abuse and limited investors disclosures. What's more, many ICOs in the past have proven to be fraudulent schemes like “pump and dump" schemes, money laundering, black market dealings (silk market deals), illegal online wires, and more.
While legislation on ICOs is still inconclusive, federal agencies like the SEC expect adherence to current securities legislation. The SEC will therefore investigate unregistered offerings and fraud cases. Other agencies like the IRS investigate ICOs and other cryptocurrency dealings for underreporting and other tax crimes like filing false returns.
FinCEN focuses on failure to have and implement compliance programs that have AML/KYC policies as per BSA (Bank Secrecy Act). Institutions receiving investor money should have know-your-customer policies in place. Other agencies likely to get involved include the FBI and DOJ if there is suspected criminal activity. The CFTC gets involved in commodities fraud.
The Howey Test and Its Role
How Does the SEC know if an ICO is a security or investment contract offering?
The SEC utilizes the Howey Test to determine if an ICO qualifies as a security or investment contract. ICOs that qualify as securities must face SEC registration if there is no exemption. ICOs which aren't securities offerings don't require SEC registration.
Background: Howey Test
The test dates back to 1946. The test is named after a case between Howey Company and the SEC that the Supreme Court determined decades ago. In the case, the SEC argued that the Howey Company offering at the time (selling citrus groves and allowing owners to lease land back to the Howey company) qualified as an unregistered securities offering.
The supreme court used four conditions to decide if the offering was a security or investment contract. These four conditions are used to date to determine if an offering qualifies to be a security offering subject to federal securities laws. The conditions include: an investment (of money) in an enterprise with the expectation of making profits derived from other people's (third party) efforts.
The SEC uses the Howey Test to date to determine legal from illegal unregistered ICO offerings. Illegal offerings are investigated immediately and the necessary enforcement action taken.
Security vs. Utility Tokens
ICOs can either involve security or utility tokens. Understanding the difference is crucial since security tokens must be registered by the SEC. Utility token offerings don't require SEC registration.
Similarities Between Security and Utility Tokens
The main similarity between security and utility tokens is that they are both digital asset offerings that are stored on blockchain.
Difference Between Security and Utility Tokens
Differences in Purpose of the Token
Utility tokens are usable for purposes that a token was created for. The tokens can't be used for other purposes – i.e., as currency/trading purposes outside a closed ecosystem, such as in an app only.
Security tokens can be used for purposes outside an ecosystem. Security tokens represent digital investments in an entity. Owning a security token is like owning traditional shares, with the only difference being the tokens are stored and transferable on the blockchain.
Differences in Where a Token Derives Value
Utility token value isn't linked to the company issuing the token. The token value is decided purely on the token's supply and demand. Unlike utility tokens, the value of a security token will depend on the company value. Good company performance generally increases the value of a security token and vice versa.
Differences in SEC Registration
Security tokens require registration with the SEC. As a result, they must be subjected to Howey Test and meet the four conditions. Utility tokens don't need SEC registration since the tokens hardly involve expectation of profit from third-party efforts.
Understanding the above is critical since the SEC expects ICO offerings that qualify as security offerings to meet SEC registration requirements or face investigations and enforcement actions that can include hefty fines (amounting to millions) and jail time in some instances.
If you want help on structuring your ICO offering, call us.
ICO Help
ICOs are products of technological advancement. They provide quicker and more secure ways for start-ups to get funded minus the many requirements/conditions of traditional funding.
However, ICOs must be crafted by an expert to avoid SEC and other federal agency investigations. ICOs are bound to attract attention from federal authorities. If you don't take measures to ensure your initial coin offering is compliant or is structured to avoid SEC registration, you or your company are bound to get into trouble.
Contact our initial coin offerings team of attorneys and consultants with 100+ years of combined ICO and cryptocurrency experience. We structure ICOs, help clients in ICO-related SEC investigations, and even craft ICO defense strategies if you are already facing federal government charges.
