Securities regulation of ICOs

Background

Much of the recent media and regulatory focus on Initial Coin Offerings (ICOs) surrounds the moves of the US Securities and Exchange Commission (SEC) and similar financial regulators to apply existing securities regulations to ICOs. This issue is likely to be the key consideration for entrepreneurs looking to run an ICO, and potential purchasers in an ICO.

The underlying question is essentially whether tokens issued in an ICO constitute a financial or investment product similar to a share issued in a standard Initial Public Offering (IPO). If they do, complex financial regulations are likely to apply — and many regulators have indicated that they will enforce them.

What does it mean for my project?

In essence, the answer to the securities question will depend on the character of the tokens and the relevant jurisdictions’ laws. The reason this can be problematic for many ICO projects is that the laws governing the issue of securities can be extremely complex and impractical, and the international nature of ICOs means that research of the laws across multiple jurisdictions is often necessary. Combined with the clunky nature of securities laws that are mainly focused on “old-school” large Initial Public Offerings (IPOs), which are usually undertaken by established entities with extensive resources and major financial backing.

Most ICO teams are not in a position to deal with this administrative headache. While some extremely well-funded ICOs have access to the resources required to obtain comprehensive legal advice across a range of areas in several jurisdictions, most smaller and bootstrapped teams do not have access to a similar level of funding and capability.

Most acknowledge that the underlying motive of securities laws, to protect the public from sketchy products, is probably a good one. However the current legal rules for doing so are heavy-handed and discouraging for smaller start-ups. Teams that lack the resources needed to determine and comply with the varied and complex laws across a range of countries will often choose to not comply (never a good course of action when dealing with securities law) or seek alternative fundraising mechanisms.

With this in mind, it is understandable that many smaller ICO teams would seek to avoid these regulations by instead treating their ICO tokens as something other than securities. However, doing so raises a host of other tax legal issues, some of which we have addressed here.

Lupercal Capital is an independent cryptocurrency advisory firm. If you are a cryptocurrency startup or considering an Initial Coin Offering (ICO), we’d love to talk with you — feel free to contact us at enquiries@lupercalcapital.com.

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