ICOs and Securities Regulations

Much of the recent media and regulatory focus on ICOs surrounds the moves of the US SEC and similar financial regulators to apply existing securities regulations to ICOs. This issue is likely to be the key legal consideration for anyone hosting (and potentially those buying into) an ICO.

The underlying legal question is whether tokens issued by an ICO constitute securities. If they do, complex financial regulations may apply — and many regulators have indicated that they intend to enforce them. If they do not constitute securities, then ICO issuers may fall outside the scope of more complex financial regulations. The answer to that question is likely to depend on the character of the tokens and the relevant jurisdictions’ laws.

Interestingly, most attention to date seems to focus on whether ICO tokens constitute securities, but in some jurisdictions there are a range of other ways that the tokens could potentially fall within the scope of corporations/financial law frameworks. In reality, it seems that whether ICOs fall within corporations/financial law is likely to be more than a binary question of are the tokens securities or not, but that is an issue for another day.

The reason that the application of key corporations/financial law is likely to be problematic for many ICO projects is that the laws governing the issue of securities can be extremely complex and onerous, and require research and understanding of these laws across multiple countries. Typically, these regulations are designed to address large IPOs and multinational entities, which are usually undertaken by established entities with extensive resources and major financial backing.

Most ICOs are not in this position. Whilst some ICOs have the extensive resources required to obtain comprehensive legal advice across a range of legal areas in various countries, most are new start-ups looking to introduce a promising new idea.

The underlying policy behind the relevant corporations/financial laws is probably a good one: to protect consumers from questionable projects and misrepresented investments. The legal mechanism for doing so could seem heavy-handed for smaller start-ups, which do not have the resources needed to determine what is required of them, let alone comply with the varied and complex laws across a range of countries.

It is understandable that many smaller ICOs seek to avoid these regulations by characterising their tokens as not being securities. However, doing so potentially raises a host of other legal issues.

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