Hire an ICO lawyer: An initial coin offer abbreviated as ICO refers to the process involved in raising capital for a company by issuing a new token or coin. Remember that the business can use these funds to develop a platform for the company or any other business project. ICOs are on the increase, but the SEC still considers that the technology behind them called the blockchain is at a launch stage, so there is little regulation.
Because of this, ICOs are a risk for potential fraud as they are not consistently regulated compared to traditional capital markets. Besides this, the SEC has a framework for investment contracts that helps businesses to determine whether or not they have registration obligations. Therefore, if you decide to register Initial Coin Offerings with SEC, then it’s a good idea to consult an ICO attorney to help you evaluate your compliance obligations. This article discusses the key things you should consider before you hire an ICO attorney.
Cryptocurrencies and blockchain technology
Cryptocurrencies refer to digital representations of assets. You should note that these are decentralized, meaning they can operate without interference from government or third-party on peer-to-peer networks. Bitcoin was the first cryptocurrency and it was created in 2008 and was launched in 2009. No doubt, bitcoin gained a lot of popularity because of its speed, pseudonymity, and low transaction fees.
Altcoins are the cryptocurrencies that were launched after bitcoin. Some examples of Altcoins include Litecoin, Ethereum, Cardano, Bitcoin cash, and Stellar.
It’s worth mentioning that blockchain technology is the backbone of crypto transactions. The blockchain is decentralized and is distributed across several computer nodes. As explained earlier, decentralized means that there is government or banking authority that governs it. Simply put, every block or link is associated with the prior one to create the blockchain.
Now, many individuals and start-ups are utilizing blockchain technology as well as peer-to-peer networks to start their ICOs. Ideally, you can think of an initial coin offering as an online IPO that utilizes digital assets to raise cash. But unlike an IPO, an initial coin offering is operated without an oversight of the government and is stored on the blockchain. An initial coin offering raises funds by utilizing peer-to-peer network in online transactions. And, anyone can launch them as long as they have an idea, a little cash, and internet connection.
This is usually good to help businesses get the funds they require to grow their operations without any need of finding venture capitalists or investors. But the ease in launching an initial coin offering attracts the interests of the SEC.
This is also because you can launch an initial coin offering without registering with the SEC. Regardless of whether the launched token or coin is a security concern is another issue and tends to differ from case to case. As a result, the initial coin offering has now become a controversial issue for the SEC.
However, failing to register your initial coin offering with the Commission or even failing to meet exemptions where the initial coin offering is regarded as a security issue can always result in a federal investigation, especially for unregistered securities.
Remember that the major concern for the SEC about a coin offering is that there can be a huge potential for fraud, insufficient investor disclosures, and market abuse. Money laundering, illegal online wires, pump and dump schemes, and online black market dealings are quite common when utilizing cryptocurrencies.
While there is no valid legislative framework required to regulate initial coin offerings, federal agencies like the SEC usually rely on already-existing laws for their investigations. For instance, the SEC can investigate unregistered offerings and fraud by looking for instances of tax evasion or even filing false returns associated with virtual currencies. Other agencies involved include the FBI when there is criminal activity involved and CFTC for commodities fraud.
What you should consider before you get an ICO attorney
You need to find an experienced lawyer who can guide you through the ICOs launch so that it’s compliant with the federal law. This is especially true when it comes to federal securities laws. Considerations to evaluate for your initial coin offering include
Your initial coin offering project involves the SEC registration
You should consider this to be a crucial factor worth looking into. You should first figure out whether your token or coin meets the SEC’s standard of security, meaning that it has to be exempted or registered. The courts and SEC use what is known as the Howey Test to determine whether digital assets or digital asset projects are securities or investment contracts under federal law.
The Howey Test has four elements which include an investment of money, in a common enterprise, with the expectation of profits, and derived entirely from the efforts of others.
They need to satisfy all these elements for the token or coin to be considered as a security. When the token or coin is regarded as a security, then your business can proceed under a registration exemption like Regulation D or Regulation S, meaning the token or coin can be offered and sold outside the country. If one or more elements are not satisfied, then the token or token is not considered as a security. Instead, it is regarded as one of utility. Remember that utility coins or tokens don’t need registration as they are not securities.
The project involves tokens or coins that are considered as securities
Besides the tight registration obligations that can apply to your token or coin, the initial coin offering project can also require additional reporting, registration, and other federal obligations. When the token or coin is regarded as a security, then you need to determine whether your services to the public need registration as an investment adviser or a broker-deal.
This tends to depend on several considerations like whether you are facilitating token or coin trades or offering investment advice by charging a fee. Regardless of the consideration, a business that intends to launch an initial coin offering has to evaluate properly. Some businesses utilize their websites to launch and issue initial coin offerings, so these platforms can also require registration with the SEC.
Potential for fraud and the novel technology
The SEC always investigates blockchain businesses that are involved in initial coin offerings to check if they are engaging in market manipulation, fraudulent activities, and other activities that the federal securities laws consider to be misconduct. Some of the commonly investigated areas include the anti-fraud provisions or even those concerning the sale of unregistered securities.
It’s worth noting that ancillary issues can involve you failing to get a federal money transmitter license, working as an unregistered investment adviser, or failing to register your initial coin offering platform.
You need an initial coin offering attorney to assist you structure your ICO
As you can see, initial coin offerings can be complicated projects. They may require significant investment in time, manpower, money before, during, and after launching the coin or token. The registration obligations means that you need to thoroughly examine the coin or token, the people involved, and the platform itself.
Aside from this, drafting and checking a legal service agreement and other expansion plans may affect the requirements of registration of your initial coin offering. There are several ways a lawyer can help your blockchain company with your initial coin offering.
This includes structuring the initial offering to suit your business needs, doing a legal, regulatory, and compliance review, checking whether the token or coin is a utility token or a security token, advising you on compliance, drafting legal service agreements, helping with tax preparation for your initial coin offering, and many more. Therefore, if your project can involve any of these services, you have to secure the services of an initial coin offering attorney for legal advice.
Initial coin offerings can have a high risk of liability exposure
You can offer your initial coin offering to the public to raise funds for your new business operations. Regardless of whether the issued token or coin is for investment or utility purposes, the blockchain technology is novel and has some risks. The technology is used by the public to record all cryptocurrency transactions securely and transparently. However, most cryptocurrency transactions cannot be traced, leading to risks for fraud, market manipulation, money laundering, and other crimes. As a result, federal agencies like the SEC are interested in businesses that issue initial coin offerings.
And, federal legislation like the PATRIOT Act and the Bank Secrecy Act impose a variety of obligations on specific businesses to maintain records and reports for the transactions of their customers. There are also other requirements like training requirements, compliance programs, and annual audits or reviews. Some cryptocurrency businesses can also have licensing and registration requirements for dealing in money transmission services.
Keep in mind that some initial coin offerings involve tokens or coins that can meet the definition of the SEC of a security. Therefore, the company needs to register its tokens or coins with the SEC. Failing to do this can lead to significant civil and criminal penalties, disgorgement orders, injunctions, and reputation harm. So you need to determine your business has registration obligations that fall under the federal securities laws or any other federal provisions. The best thing you do is to find an initial coin offering lawyer to help you.