Harvard Business Review declares the ICO legal — and highly unusual
The “Initial Coin Offering” is fast, lucrative, and increasingly well-defined way to finance a seed-stage venture or bootstrap a protocol.
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The concept behind the ICO is pay to play. Rather than recruiting users, and selling them a subscription, you simply sell users “tokens” which give them access to a new product or service. Tokens are traded in the market and can be purchased by new users anytime.
At least — that’s the thinking. In reality, ICOs (or “token sales,” as they’re sometimes called) are legally and economically fraught. Why are venture and private equity investors interested in the ICO concept?
Two reasons, according to Harvard Business Review:
One is profits — cryptocurrency investors made some massive returns in 2016… The second reason VCs are becoming more interested in ICOs is because of the liquidity of cryptocurrencies. Rather than tying up vast amounts of funds in a unicorn startup and waiting for the long play — an IPO or an acquisition — investors can see gains more quickly, and can pull profits out more easily, via ICOs.
So, is it legal? Yes. At Iterative Instinct, we have two teams of lawyers working on that very question. The HBR article does a good job summarizing what they, and other attorneys in the field, have concluded. HBR explains why tokens do not pass the Howey test:
ICOs are the Wild West of financing — they sit in a grey zone where the U.S. Securities and Exchange Commission (SEC) and many other regulatory bodies are still investigating them. The main problem is, though, that most ICO’s don’t actually offer equity in start-up ventures; instead, they only offer discounts on cryptocurrencies before they hit the exchanges. Therefore, they don’t fit into the current definition of a security, and are technically outside of traditional legal frameworks. Secondly, they are global instruments — not national ones — and they are funded using bitcoin, ether and other cryptocurrencies that are not controlled by any central authority or bank. Anyone can invest, and they can even do so pseudo-anonymously (it’s not impossible to find out who people are, but it’s not easy, either). Currently, there’s no Anti-Money Laundering (AML) law or Know Your Customer (KYC) framework, though some companies are working on that.
The road seems clear for this new marketplace to grow.