ICOs are having a positive impact on the world. For the first time in history, they allow startups to use the blockchain’s peer-to-peer exchange to trade, skirt dependency on VC capital, self-finance, and profit from increased usage of their products. These products are built on the blockchain, providing groundbreaking solutions that lead us into a more transparent, yet private and secure world. All good, right?
Not necessarily. As history has shown with many newly-blazed trails, the wild west of ICOs and cryptocurrency has also paved avenues for bad actors and scammers looking to make a quick buck. A libertarian view of the world says we should all be free to trade and take risks as we please; however, there is a paradox in this view: if we want to see this classically liberal eco-system flourish then we need to embrace some light regulations, so that it’s not forever shutdown by governments, as seen in China already. If we want ICOs to survive, tokens to achieve wide acceptance, and blockchain solutions to proliferate, then a proper amount of regulation and investor education is in order. It’s not a compromise, for it helps to level the playing field and isolate the bad actors.
Regulation Compliance
Regulations notoriously hinder the market and stifle growth. Recent news revealed the SEC is cracking down on ICOs or at least investigating them, looking for bad actors and scaring investors, many of whom will shy away from getting involved with anything that might later be classified as illegal. Investors might be protected on one hand, but then are missing out on other great opportunities.
However, in a very short period of time, the ICO world has proven that easy money and opportunity attracts all kinds of actors — the good, the bad, and the questionable. Regulations level the playing ground and put enforcement in place for companies to do at least the basic due diligence and offer transparency, disclosure, and risk-management to a budding economic system. Due diligence comes at a cost– it slows down fundraising, but in the end, it’s building a stronger foundation for your company and product offerings.
What is the Right Way to do an ICO?
For those of us who can’t see the details of the SEC subpoenas, these probes should be a simple reminder that doing legal due diligence is essential and that we need to work together as an industry to promote best practices and adhere to legal structures around us.
For those of us who are a U.S.-based company, our best bet is to take the SEC investigations seriously and comply. Bring in key advisors and knowledgeable attorneys who can help navigate the ICO in a legal and efficient manner. The first questions anyone should ask — be it an adviser or a corporate officer — is,
“Are we following the spirit of the law?”
“And if we are, are we utilizing all the tools available to execute on that spirit?”
Currently, complying means:
- Verify investors’ identities through KYC and AML checks. Many ICOs are just asking for emails and phone numbers, but this is not enough. You may find the KYC/AML checks required by SEC regulations to be restrictive and counter-productive to the anonymity of the ICO market, but if you don’t check who is investing, you make yourself and your investors vulnerable to money laundering and terrorist financing. If you are offering a security, performing a valid KYC/AML check is necessary.
- Verify investors qualify as accredited investors, as defined by the SEC if you are offering a security — this is a requirement of all US persons who invest in a private security offering. A SAFT (Simple Agreement for Future Tokens) instrument is likely a security.
- Align the incentives of the founders and directors to be consistent with the investors’. The goal of the ICO should not be a get-rich-quick process for the founders and directors. The hard work begins once the ICO is complete. Providing major kick-backs or a big portion of the tokens to founders and directors that immediately vests can lead to potential conflicts and loss of incentives. The incentives should be aligned in a manner that promotes them to grow the investments.
Other Aspects to Consider When Preparing an ICO
Doing an ICO the right way goes beyond SEC compliance and includes other important factors, as well. Startups should have at least a working product and ideally real customers beforelaunching an ICO. There are too many ICOs that have raised millions of dollars on promises to build something without having anything but a white paper that theorizes future technology. This is extremely risky for investors. Such companies would be better served to raise smaller amounts of money through traditional means (such as VC funds) to seed their product development and create, at a minimum, early stage proof of the viability of their proposed plans.
Not to say you shouldn’t have a white paper, because those are essential, as well. In addition, provide documentation that offers transparency about how the tokens will work and how the funds will be used.
For examples, see ShoCard’s ICO documentation:
The Downside
There’s no denying that there are tradeoffs to doing an ICO this way. And we’d be remiss to not recognize the downside. This is not a get-rich quick plan for insiders; this is a long-term value creation process. Limiting and vetting investors slows down fundraising and requires more education, but it’s necessary to protect everyone involved. Over time, that too will change as more investors and companies begin to understand the regulations and why we must comply with the SEC.
In addition, over regulation can cripple this new technology/economy and what it offers. Cryptocurrencies are new and our existing laws haven’t kept up. We have to work within the confines of our current laws but urge the government and regulators to move fast to keep up with innovation. U.S. blockchain companies compete globally with other blockchain projects; therefore, we need to find the right balance in regulation to protect consumers and investors, but at the same time not stifle growth.
How ShoCard is Fueling a Healthy ICO Eco-System
For ShoCard, it took us a long time working with our attorneys before we made our coin offering. We have done everything in our power to understand and comply with regulatory requirements as if we would one day have to defend our approach to the regulators.
The ShoCard ICO is not only taking measures to follow SEC regulations to protect the company, its stakeholders and its SAFT investors, but it’s also paving a path for other ICOs to follow suit. We will be using our own product (mobile identity verified on the blockchain) to register ICO investors, perform KYC/AML checks, and digitally sign/certify on the blockchain each investor’s qualification statements, as well as the SAFT itself. We are eating our own dog food and demonstrating to investors the exact product they are buying into. And we will be offering this product to other companies wanting to ICO. I will publish another blog shortly explaining our ICO KYC product in more detail.
Due Diligence is the Key
It’s an exciting time to usher in this new peer-to-peer value exchange that will surely lead us to a better world, one that’s more transparent and accessible, and where our identities are kept private and secure from hackers. Yes, there is a lot of blockchain hype and we should beware of the cryptocurrency bubbles, which is why it’s more important than ever to make sure you do due diligence before launching an ICO.
- For more information about our ICO: www.shocard.com/tokensale
- To sign up for the SAFT and begin the KYC product: SAFT Sign Up
