Willcox, Buyck & Williams, P.A. explains whether or not initial coin offerings can be regulated as securities.

Can Initial Coin Offerings Be Regulated as Securities?

The Securities and Exchange Commission (SEC) continues to warn investors of the risks of Initial Coin Offerings (ICOs). On its website, the SEC encourages investors, securities lawyers, accountants, and other professionals to read the Investigative Report issued by the SEC in 2017 concluding that some tokens are securities. If you are unfamiliar with ICOs and digital currency, you may want to consult a South Carolina business and commercial law lawyer before you invest in ICOs or decide that an ICO is a great way for your startup to raise capital easily and quickly.

What is an Initial Coin Offering?

An Initial Coin Offering (ICO) is one of the newest ways for startups and companies to raise money without turning to venture capital or public stock markets. Companies use ICOs as fundraisers. They create and sell digital tokens to investors to fund a platform or project. Blockchain networks distribute the tokens.

Tokens offered in ICOs do not equate to shares of the company. Investors receive a share in the project’s profits or access to a service in exchange for their investment. There is not a traditional legal contract for a court to enforce. Instead, smart contracts (software code) enforce the rights of token holders. Companies using ICOs have raised millions of dollars in digital currency, sometimes within hours.

Do ICOs Involve the Issuance of Securities?

In its Investigative Report, the SEC did not state conclusively that all ICOs are subject to regulation under federal securities laws. However, the SEC did state clearly that federal securities laws apply to decentralized autonomous organizations the same way they apply to traditional companies. The securities laws also apply even though investors may purchase securities with virtual currencies, and distributed ledger technology distributes the securities.

In other words, some ICOs are securities offerings and therefore subject to the SEC’s jurisdiction for enforcing federal securities laws. With that in mind, ICOs that are securities may need to be registered with the SEC unless they fall under an exemption to registration. It is also important to remember that referring to a token as a utility or configuring the token to provide a utility does not stop the token from being a security.

How Do You Know if the SEC Regulates an ICO?

Unfortunately, it can be difficult to know if an ICO is regulated as security until you analyze the offerings based on the principles outlined in the SEC Investigative Report. In general, ICOs or tokens based on the potential for profits through the managerial or entrepreneurial efforts of others contain the characteristics of a security according to SEC Chairman Jay Clayton.

The SEC has a great deal of information on its website about Initial Coin Offerings, including SEC resources that can help individuals understand ICOs.

Ask a South Carolina Business and Corporate Law Attorney

If you want to raise money for your company by using an ICO, you may want to consult with an attorney to discuss the legal requirements for registering the ICO with the SEC. Determining whether securities laws apply to your ICO can be difficult and time-consuming.

A South Carolina business and corporate law attorney can determine which laws and regulations apply to your ICO and business and assist in registration and compliance if required. A business and corporate law attorney can also assist you with other business and legal matters related to structuring and operating your company. Schedule a consult with a member of our team at Willcox, Buyck & Williams, P.A. to learn more today.