Registration & Regulatory Issues - Initial Coin Offerings (ICOs)
Initial coin offerings, or ICOs, can be an effective way to raise investment funds for your business. However, given the way the SEC has cracked down on cryptocurrencies in the last few years, they are prone to risk. After the billions of dollars that were raised through ICOs in 2018, the use of tokens as initial offerings has slowed down considerably as the SEC has taken more aggressive legal action.
At Hart David Carson, LLP, we provide legal services on behalf of organizations looking to create an ICO. Our services include assistance with structuring your offering and filing all needed paperwork with the SEC in order to avoid potential legal complications. ICOs as Securities
While many organizations have tried to pass off their ICOs as “utility” tokens through SAFT agreements—and therefore not securities—the SEC still considers them to be regulated investments if they meet the qualifications of the Howey Test. These qualifications include:
- An investment contract
- A common enterprise
- An expectation of profits
- Promotion on the part of a third party
In essence, if there’s an expectation of profit due to another party’s efforts, your ICO is likely to be considered a security per SEC guidelines, even if it has some utility function. As such, registering your offering or applying for an exemption is typically the safest course of action to take since doing so can help you avoid expensive legal ramifications.ICO Exemption Options
When it comes to filing an exemption with the SEC for your initial coin offering, there are a few options to choose from. Two of the most advantageous options for ICOs are Regulation D and Regulation A+ offerings. Regardless of the method you choose, it will need to be handled in a way that complies with SEC requirements, which is why legal aid is so important during this stage of the process.Regulation D Offerings
A Regulation D offering allows you to be exempt from full registration, but only if you satisfy specific requirements and file a form with the SEC. There are a few options here, including:
- Rule 504, which allows you to offer an ICO of up to $5 million over a 12-month period to an unlimited number of investors
- Rule 506(b), which allows you to sell to up to 35 purchasers with no general solicitation
- Rule 506(c), which requires your purchasers to be accredited investors, but has no limits on general solicitation
Regulation D also includes transfer restrictions and is subject to anti-fraud rules. You’ll need to file a form, but there’s far less regulatory oversight to deal with than you’d have with normal registration.Regulation A+ Offerings
As of March 2021, a Regulation A+ exemption allows you to sell securities at either a $20 million or $75 million tier over the course of 12 months. Each tier has its own requirements:
- Tier 1 ($20 million): You must register your offerings with any state in which you’ll be selling.
- Tier 2 ($75 million): You must qualify your offerings with the SEC. No registration with state governments is required under federal law, but some form of filing may be necessary per state requirements.
Both tiers allow private companies to get investment funds from the general public, and they expose you to far less regulatory oversight than SEC registration would.Registering Your Initial Coin Offering Correctly
Whether you register your ICO or file an exemption, you’ll need to do so in strict compliance with SEC rules and other regulations. Many other laws may apply to your initial coin offering and your operations as a whole, so involving legal help is never a bad idea.
Our attorneys can assist you throughout this process while keeping you in line with the ever-developing regulations surrounding cryptocurrency trading as a whole. To schedule a consultation or learn more about our legal services, contact Hart David Carson, LLP today.