Question

Your company wants to do an initial coin offering of digital tokens similar to Ether by Ethereum. You would like to raise at least $10,000,000 by offering future digital tokens to investors in exchange for their investment capital up front. These tokens will become functional only after the proposed platform is developed and becomes operational. You doubt that you will raise all of the capital from institutional investors or from high net worth individuals (net worth greater than $1,000,000). Your business associate is concerned about whether the securities laws apply to this offering and if so, what you have to do. You absolutely do not want to do a full-blown securities registration with all of the work and costs. Do the securities laws apply to this offering and why? What specifically would you do if the securities laws do apply to this offering?

Answer 1

Initial coin offerings, which have in the past been launched by centralised teams, could fall under SEC rules. This is because initial investors could be buying coins in the belief they can profit when they go public and increase in value. In addition, at such an early stage they are not sufficiently decentralised.

The company aims to raise money by offering future digital currency in exchange for their investment capital upfront. After the proposed platform is developed and becames operational, the investors could sell their currency for a profit. Hence, it clearly falls under securities law.

Now, that the securities law is applicable for the offering,

• Get your Securities Law Compliance Report (SLC Report) prepared by ICO Legally
• US Securities Exchange Commission (SEC) has cautioned the Blockchain based organisations engaged in offer & sale of tokens through ICOs and also the exchanges providing for trading such token, that the federal securities laws apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a traditional company
• Security tokens can be subject to many fundamental requirements including registration of the token offering (ICO) with the Securities Regulator and proper disclosure of the project unless a valid exemption applies such as sale to Accredited Investors.
• Securities exchanges providing for trading in these securities must register unless they are exempt.
• The purpose of the registration provisions of the federal securities laws is to ensure that investors are sold investments that include all the proper disclosures and are subject to regulatory scrutiny for investors' protection.