The Status of ICO Regulations in the United States
The Initial Coin Offering (ICO) has been gaining popularity due to its innovative input and contemporary winning strategy in the world of business. Usually held by startup companies in order to sidestep the demanding yet systemic process required by venture capitalists or banks, the ICO has given a breath of fresh air to crowdfunding.
What is Initial Coin Offering (ICO)?
Emerging from the limits of the old-style financial system, the Initial Coin Offering (ICO) has contributed enormously to the success of different projects and companies in terms of enabling them to obtain the budget they need to start their business or project.
ICO is known as the cryptocurrency version of crowdfunding. It is an event with a specific target for project funding, which usually lasts from a few hours to a few weeks. In this event, all are allowed to avail of recently released tokens in exchange for the established cryptocurrencies, such as Bitcoin (BTC) or Ether (ETH). They are like real public offerings except that investors do not get a share of the business, although they can use the tokens received to buy the company’s products or services. They can also use the tokens to participate in blockchain activities, such as accessing cloud computing services or joining an automated investment. Moreover, they can sell these tokens in the secondary market or change them for bitcoin or cash.
Controversy over the legality of ICOs sprung from the fact that they are not regulated and that basically anyone can participate in them. There is concern that the use of tokens for signifying profit shares could violate financial regulations.
They come with risks, which may lead to fraud. This is especially so since it’s not clear to investors how the company will use their money and because the company does not incur penalties if they fail to deliver. Moreover, ICOs are not SEC-registered, which means that federal securities laws do not cover them. This in turn means that investors have no way of recovering their money should the business they invested in fail.
The Regulation of ICO in the United States of America
ICO transactions are very useful. However, even if these transactions are on record, investors should still be cautious, as there may be ICO activities or crowdsales that are deceitful.
The fact that ICOs do not follow any regulatory system made it more attractive to companies and project initiators. It enabled them to launch their businesses faster. However, the SEC has said that some ICOs are still subject to adherence to securities laws. It should be noted that if the ICO involves the offer of a security, then the ICO must abide by the prescribed securities law requirements or continue with the aide of exemption, should it be possible.
When is a token considered as a security?
Although ICO has been very helpful in raising money for funding, there are still those who are skeptical about it. These people have warned that the tokens for sale are plainly a new form of shares, and selling them without any license violates federal securities laws. Thus, the SEC confirmed in its ruling that the tokens in question are indeed securities.
This ruling was based on a SEC investigation into a German corporation shadowed by a group named “The DAO” or Decentralized Autonomous Organization, which successfully raised up to $150 million via ICO last 2016.
The group invited people to purchase tokens, which in turn would be used to push through an automated investment strategy and give those who bought the tokens several rewards. One of the people who led the group was Christopher Jentzsch who admitted that he got to like the process of receiving dividends. Thus, the SEC reached the conclusion that in the case of The DAO group, the tokens were securities.
According to John Roberts of fortune.com, the SEC’s conclusion can only be applied to The DAO but that the ruling somehow gave further information about ICOs, particularly with regards to the question of whether tokens acted as securities. These will depend on the findings of the cases examined.
Other Sides of the Story
On the regulatory and legal angle, it is arguable whether the issuing of coins corresponds to the creation of a new security and should therefore be evaluated under the judgement and processing prescribed by SEC.
As Henry Engler of Reuters indicates, this presents dangers to investors, being a new test for U.S. regulators. The director of research at crypto-currency advocacy group Coin Center Peter Van Valkenburgh also said that what the investors in the market usually want to escape from is for the tokens to be considered security. He also reminded everyone that organizations such as the SEC regulate IPOs. Thus, changing a letter won’t make things better. In this regard, why would one adopt the term used by the regulator when you are trying to build something with the utmost hope that they won’t be regulated?
Engler further points out that SEC’s point of view on the issuance of such tokens was not clear due to the agency’s silence about it. However, industry experts say that it is not unbeknown to them that the issue is being rigorously explored. It is likely that the SEC might give details and guidelines for ICOs, as well as on proceedings versus other ICOs. Thus, the haziness of formal regulations regarding ICOs might soon be dispelled, and the current problems given gradual solutions.
Conclusion
The business world has been growing as new innovations introduce new ways of doing things. However, these can come with uncertainties. As such, we should take note that participating in the market involves being careful in choosing where we put our money. Taking part in the business world calls not only for courage, but also for wisdom.
Learn how you can safely participate in ICOs. Visit https://www.tokenlab.io/ for more information.
Sources
Engler, H. (2017, June 14). “Initial coin offerings” present dangers to investors, new challenge for U.S. regulators. Retrieved September 23, 2017, from https://www.reuters.com/article/bc-finreg-bitcoin-ico/initial-coin-offerings-present-dangers-to-investors-new-challenge-for-u-s-regulators-idUSKBN1942HF
How does an ICO work. (2017, July 05). Retrieved from https://www.cryptocompare.com/coins/guides/how-does-an-ico-work/
Momoh, O. (2017, September 05). Initial Coin Offering (ICO). Retrieved from http://www.investopedia.com/terms/i/initial-coin-offering-ico.asp
Nowak, G., Guagliardo, J., Friedel, R., & Kornfeld, T. (2017, August 09). Blockchain and Initial Coin Offerings: SEC Provides First U.S. Securities Law Guidance. Retrieved from https://corpgov.law.harvard.edu/2017/08/09/blockchain-and-initial-coin-offerings-sec-provides-first-u-s-securities-law-guidance/
Roberts, J. (2017, July 26). The SECs Big Digital Coin Ruling: What It Means in Plain English. Retrieved from http://fortune.com/2017/07/26/sec-icos/
