Why we’re not doing an ICO

Since we’re building a platform where anyone can conduct an ICO with full legal and regulatory compliance, it might seem weird that we’re not conducting an ICO ourselves.

That’s because, as of this moment, there is no way to conduct an ICO with full legal and regulatory compliance. It’s that simple.

How to conduct an ICO, legally

To fund your startup through an ICO or token sale, first you need to decide how you will offer your tokens.

Generally you want to offer your tokens as “covered securities,” otherwise you will need to get your token approved individually by each state and territory of the United States. You only want to offer your tokens as non-covered securities if you are only offering them within one state, such as California, or just a handful of states.

You want to use an existing regulatory framework

Unless you’re willing to go to court with regulators to set a new precedent, you probably want to comply with existing regulation.

For covered securities, relevant regulations are Regulation A, Regulation CF, and Regulation D.

Regulation A

You want to use Regulation A Tier 2 instead of Tier 1, because Tier 1 securities aren’t covered, meaning they need to be qualified by each state and territory of the United States. Tier 2 only requires qualification on the federal level.

However, for that exemption from state-level qualification, you must submit to the following:

• Must be audited by a CPA under GAAS or PCAOB standards.
• Must use an SEC registered transfer agent.
• Must be from the United States or Canada.
• Must not already be filing reports with the SEC.
• Must not be an investment company.
• Must collect AML/KYC, or use a FINRA registered broker-dealer.
• Must file offering documents with the SEC.
• Offering must be between $20 million and $50 million.
• If not listing on an exchange after offering, non-accredited investors are limited to investing 10% of the annual income or net worth.
• If listing on an exchange after offering, you must be listed on a national securities exchange, like NYSE, Nasdaq, or IEX.
• Cannot solicit investment until qualified to do so by the SEC.
• Must file the results of your offering with the SEC.
• Must file ongoing reports with the SEC, like any other public company.

Also, though your offering was exempt from state-level qualification, many states will still require that you file the offering with them.

Regulation CF

The CF stands for crowdfunding. Regulation CF is a new framework designed to help new and small companies secure investment online.

However, to use Regulation CF, you must submit to the following:

• Financial statements must be reviewed by a CPA.
• Must offer the investment entirely through a single FINRA registered broker-dealer operating an online FINRA registered funding portal.
• Must only solicit investment through that FINRA registered funding portal.
• Must be a United States company.
• Must not already be filing reports with the SEC.
• Must not be an investment company.
• Offering must be $1 million or less.
• Non-accredited investors are limited to investing either $2,200 or less, or no more than 5–10% of their annual income or net worth.
• Must update the SEC when 50% and 100% of the offer is subscribed.
• Must file annual reports with the SEC.

Regulation D

Regulation D is actually a number of different exemptions, each its own rule. Rules are non-exclusive, meaning you may use multiple rules for exemption, but only if they do not disagree with one another. But only two of those rules result in “covered securities,” so we will only discuss those.

Rule 506(b)

• Cannot be solicited publicly — that means it can’t be written about on the issuer’s website, social media, or advertised.
• Must collect AML/KYC.
• No more than 35 non-accredited investors.
• Private placement memoranda written and given to investors.
• Investments are “restricted securities,” meaning they cannot be resold without prior registration with the SEC.

Rule 506(c)

• Allowed to be solicited publicly — on the issuer’s website, on their social media, through advertising, or through any other means.
• Must collect AML/KYC.
• Accredited investors only, with investor accreditation verified.
• Investments are “restricted securities,” meaning they cannot be resold without prior registration with the SEC.

So what does all that mean?

It means that as of yet there is no way to conduct an ICO that is compliant with existing regulation. That’s what we’re solving.

Regulation A cannot be used

• No ledger is operated by an SEC registered transfer agent.
• ICO smart contracts don’t allow for the collection of KYC/AML.
• ICO smart contracts don’t limit non-accredited investors to investing a minor percentage of their annual income or net worth, nor do they allow for the listing of tokens on a national securities exchange.

Regulation CF cannot be used

• No ledger is a FINRA registered broker-dealer.
• No ICO smart contract is a FINRA registered funding portal operated by a FINRA registered broker-dealer.
• ICO smart contracts don’t limit non-accredited investors to investing a minor percentage of their annual income or net worth.

Regulation D cannot be used

• ICO smart contracts don’t allow for the collection of KYC/AML.
• ICO smart contracts don’t verify investor accreditation.
• ICOs are clumsy to use because the resulting tokens are “restricted,” meaning they cannot be resold, traded, or transferred without prior registration with the SEC.

Gildset is building a regulated platform for ICO issuance and token trading. Learn more about Gildset on its website: https://gildset.com.