Characterized by lack of centralization and regulation, the entire cryptocurrency space has been likened to the “Wild West.” As has been seen, however, the upside that comes with crypto’s lack of red tape comes with downsides, too – perhaps most notably the potential for scamming and dishonesty. The move from ICOs to STOs, though, marks a step away from wildness and toward regulation. Regardless, should you decide to get involved with STOs, you may still want to consult a lawyer.
The main point of this article is discussing the situations in which you may need to hire a lawyer who specializes in STOs. The topics involved in STOs are complex, though. For that reason, we’ll spend the first half of the article building a base of background knowledge from which we can get more specific about the 7 reasons you might need an STO lawyer.
ICOs vs STOs
To fully understand STOs and how they represent increased regulation in the cryptocurrency world, it helps to contrast them to ICOs. Let’s start with simple definitions.
ICO: Initial Coin Offering. An event during which cryptocurrency projects sell coins or tokens to raise funds. The coins/tokens sold are promoted to have utility. ICOs are unregulated.
STO: Security Token Offering. Similar to ICOs in that they are fundraising events. Different because the coins/tokens sold are classified as “securities.” STOs are regulated.
Put simply, there are two significant differences between ICOs and STOs: classification of tokens sold and regulation (or lack thereof).
Both ICOs and STOs are opportunities for the general public to exchange cash for coins or tokens, but projects that utilize STOs must adhere to guidelines that aren’t present for projects that go with ICOs. As a result, investors in STOs are guaranteed greater protection than investors in ICOs. In fact, individuals who invest in ICOs do so with essentially zero protection.
In many ways, STOs came about as an answer to the dangers of unregulated ICOs.
Why are ICOs Dangerous for Investors?
Because ICOs are unregulated, projects that utilize them are not bound by any real obligations to fulfill promises. Recall that coins or tokens sold during ICOs are typically promoted as “utility tokens.” These tokens represent promises for future value, but may not represent any real value when they’re first sold. Investors in ICOs, therefore, show a great deal of trust in the projects issuing the coins/tokens.
Examples of ICOs Gone Wrong
While there have been numerous successful ICOs that resulted in mutually beneficial outcomes for both the projects that issued them and their investors, there have also been many notable examples of scams and unfulfilled promises. Here are just a few examples of ICOs that resulted in broken trust and cries for regulation:
- BitConnect. Perhaps the most catastrophic ICO of all time was the one executed by BitConnect. Investors were duped out of approximately $2.4 billion. In the end, it was found that BitConnect was essentially a “Ponzi” scheme; the coins sold had no real value.
- Pincoin. The founders of this project promised investors 48% returns monthly. After raising $660 million in an ICO, they disappeared. Raising money and then running off without delivering anything in return – as the people behind Pincoin did – is known as an “exit scam.”
- PlexCoin. The individuals behind PlexCoin promoted their cryptocurrency as “like Bitcoin – but faster.” They raised $8 million and then proceeded to transfer it to their personal accounts.
The themes running through these ICOs gone wrong are deception and unfulfilled promises.
How Do STOs Protect Investors?
By classifying the coins and tokens offered during STOs as “securities,” the projects selling them are bound to their promises in a way that projects executing ICOs are not. Specifically, projects that launch STOs must comply with SEC regulations and take place on verified exchanges. Regulations and verified exchanges providee a level of oversight that may not be present in ICOs, discouraging and preventing scammers.
Having covered the basics of STOs and the reasons they’re becoming more common, we can delve into the seven reasons you may need an STO lawyer.
1. Compliance with Securities Regulations
As we discussed earlier, any entity launching an STO must comply with certain regulations. These regulations may differ depending on country and accreditation type. If you are launching an STO and not already quite familiar with the regulatory environment, an STO lawyer can help you navigate the landscape. Even if you are familiar with some regulations, STO lawyers are the best way to ensure that you’ve “crossed your Ts and dotted your Is,” so to speak.
Here is a shortlist of regulatory considerations that may be necessary for a project launching an STO:
- Registration with the SEC (Securities and Exchange Commission)
- Reg D
- Reg S
- Reg A+
- Reg CF
- Qualifying for an Exemption from SEC Registration
- AML (Anti-Money Laundering)
- KYC (Know Your Customer)
2. Assistance with Necessary Documentation
Even after ensuring that your STO complies with all necessary regulations, you may be responsible for a significant amount of documentation. Some of this documentation will be related to regulatory compliance, but a lot of it may be related to your business venture itself, as well.
Any reputable cryptocurrency project launching an STO, for example, will benefit from having documents like:
- Investment Agreements
- Private Placement Memorandums
For full compliance as well as project credibility, documents like these should be carefully produced and vetted. An STO lawyer can greatly help with these processes.
3. Consulting/Advisement for Taxes
While the previous two concerns – regulatory compliance and documentation – were relevant only for individuals launching STOs, taxes are relevant for both people launching STOs as well as people investing in them. All investments, including coins/tokens purchased in STOs, may be subject to taxation depending on where you reside. In the United States, for example, any individual who profits from buying and selling cryptocurrency will be subject to either short-term or long-term capital gains tax.
The knowledge and guidance of an experienced STO lawyer can make something as daunting as crypto-related taxes easy and stress-free.
4. Token Analysis
As covered in the first part of this article, coins or tokens issued during STOs are classified as “securities.” In order to be absolutely sure that the coins/tokens that your project is offering do qualify as securities, you’d be wise to consult an STO lawyer.
For a glimpse into the process of determining whether or not coins or tokens qualify as securities, we can refer to the “Howey Test.” The Howey Test evaluates assets based on four considerations:
- Is the asset an investment of money?
- Is the asset of a common enterprise?
- From the investor’s perspective, is there an expectation of profit?
- In the expectation of profit, does the effort come from the investor? Or others?
It goes without saying that everyone hopes they can avoid getting involved in legal disputes. It’s also clear that not everyone is successful. Whether we like it or not, legal disputes can – and do – arise in any type of situation that involves profits and losses. Individuals on both sides of STOs may end up feeling that they’ve been legally wronged. In such instances, both parties would be wise to seek out STO lawyers.
So while we hope that you never find yourself needing assistance with litigation, the possibility remains a reason that you might need an STO lawyer!
6. Company Licensing and Corporate Structuring
For both protection purposes as well as optimizing chances of success, any project launching an STO needs to be licensed and structured appropriately. This process is separate from STO regulatory compliance but can be just as complicated and hazardous. If you’re in this type of situation, an STO lawyer can be your best friend. STO lawyers with relevant experience will be able to assess your individual situation and determine the best course of action for your project, specifically.
7. Post-STO Legal Support
Your legal concerns and responsibilities are not finished when your STO is finished. In fact, the post-STO phase may be the most legally precarious part of an STO! Matters like secondary trading issues, the manner in which issued coins/tokens are utilized after an STO, and applicable legal considerations may all present serious obstacles for any project. Matters like these require STO lawyers.
It Helps to See STO Lawyers as Investments
Now that we’ve covered the reasons why you might need an STO lawyer, you can see that they are extremely valuable in a variety of different situations. Whether you absolutely need an STO lawyer to assist you with an urgent legal matter like litigation or you simply want someone to help you make sure you’re complying with all necessary regulations, the money spent on an STO lawyer is an investment in your security and peace of mind.
Like any other monetary expense, you can view the cost of investing in an STO lawyer through the lens of cost and benefit. The cost, even for a relatively expensive lawyer, is minimal when compared to the risks of not having a lawyer. Simply put, STO lawyers are exceptional investments. If you’re on the fence about whether or not you should hire an STO lawyer, you probably should!