Topic: Launching ICO based in US. SEC Rules. (Read 418 times)

I know some of the early investors in Filecoin werent happy and wanted their money back. Apparently they have to wait 5 years before they receive their tokens or something. I did not follow up on this and it could be rumours.....maybe someone knows what happened to Filecoin.

Thanks, that makes sense, with the prices of attorneys and marketing these days. For Filecoin, there was a pretty strict and lengthy vesting process.  Here is a paper I found that seems to indicate that noone is going to see tokens for at least six months after the sale is concluded. https://coinlist.co/assets/index/filecoin_index/Filecoin-Sale-Economics-e3f703f8cd5f644aecd7ae3860ce932064ce014dd60de115d67ff1e9047ffa8e.pdf

Very interesting testimony today relevant to this discussion -

https://www.banking.senate.gov/public/index.cfm/2018/2/virtual-currencies-the-oversight-role-of-the-u-s-securities-and-exchange-commission-and-the-u-s-commodity-futures-trading-commission

Chairman of the SEC defines a security (from the SEC perspective) at 1:03:36.   He completes his definition in about 40 seconds. If you listen to those 40 seconds a couple of times you will see that he hits the three prongs of the Howey Test.  In his view, as he has said earlier in the testimony that "all ICO's are securities".  This is interesting from an ICO perspective.

There's no doubt from this testimony that the SEC is focusing on ICO's. Congress wants to go further, but it the SEC seems to see the complexity of regulating something like bitcoin itself.

A large ICO can easily cost up to $500k to meet filing requirements, these include attorney fees, overhead, filing fees, personnel, marketing to investors, investor relations, KYC/AML software, in some cases reg with FINRA or other dependent agencies. The process is not something any small startups can undergo....the JOBS ACT was created to address this to allow startups to raise money more quickly. SEC filing fee is about $124.50 per $1,000,000 raised. Disclaimer I am not an expert but I had done some research on the viability of registering with the SEC.

Another thing to note is that most investors are not dumb. Tokens with no collateral, be it stock, options or dividend will not appeal to them, hence there usually is some structure to entice investors to invest -- it revolves around one word - PROFIT

I haven't seen any of the tokens distributed through SAFT mechanism on crypto exchanges, I might be wrong but I do know there is a requirement requiring investors to hold for at least 1-year, that could be the reason why. I dont think Kodak and Overstock have completed their ICO yet, Kodak just had a material release that their ICO is slightly delayed due to the due diligence process required to bring investors on board.

It blows my mind that it costs $500K to file Reg D and Reg S.  How is that possible?  Is that attorney's fees?  Or is that the ACTUAL costs of filing - like, collected by the SEC.  I can't believe it's the latter.  But I've seen that cost bandied about quite a lot, and someone I know who has a lot of experience mentioned it on a call the other day ... yet there was no time on the call for me to ask him.  Anyway ... it really seems prohibitively expensive, although given the amounts raised, I suppose in the long term, it's reasonable, relatively speaking.

Icos may need to move to countries like Belarus that has issued a tax free 5 years haven for ico.

The easiest example I've found that works is Arcade Tokens: you go to an Arcade, you have to buy tokens to use the machines, you can't use those tokens for buying pizza around the corner- they have defined utility. You also don't get a share of the revenue made by the Arcade by owning their tokens. If you gain speculative value from owning those tokens or can use them for anything beyond a defined utility- it's a security.

Well ideally, securities are equity interest in an enterprise. Or in other words shares of a company. By holding these securities you expect to gain from the gains of the company (in the form of dividends-mostly). Think of it as being a partner in the company.

On the other hand, a token can just be a means of exchange. So for example - sports cards that are exchanged by teenagers are sort of tokens. The cards themselves dont hold any intrinsic value except that the holder values them. By exchanging these cards you don't really participate in a company's performance.

What a lot of ICOs do is this - they put an entry barrier to their system and argue that you need to use these "sports cards(tokens)" to use their services. At least that's how they try to structure it legally and there is nothing wrong with it.

I am not sure if this explanation helps. I tried to be non-technical.

What's the difference between tokens and securities?

True- but only if the Token Sale counts as a Security. That comes down to the Howey Test and how the token is designed. Coinbase did a great overview of the Securities Perspective in the US, and they have a questionnaire that gives you a finger in the air assessment of what a prospective company is planning vs Howey (NOTE: it's not a substitute for legal advice, always get a qualified opinion, but scoring high will tell you that you need this resolved before even thinking of planning a CrowdSale).

The Securities legislation also only applies to public Token Sales, not if you accept investment from 'Accredited Investors' only- they're allowed to make at risk investments, but again, that means vetting them rather than throwing open the doors for capital. Same rules apply for crowdfunding of any startup in the US- not really that much of a minefield if you plan properly, and get legal advice. If you end up spending $500k, you're going to need to be a pretty significant project (Greater than $100MM valuation) to make that even vaguely worth the effort.

I think it's worth looking at some recent token sales here in the U.S. where they are following a specific model that seemed to be pioneered by Protocol Labs (FileCoin). Protcol Labs filed SEC Reg D and Reg S (you can look up their filings at EDGAR), and they created a SAFT and raised something like $53 M first with a high minimum, then raised another 100M with a lower minimum and more public. Their two EDGAR filings show a relatively low number of investors.

The current model that I see lately is 1) A Pre-Sale with a fairly large minimum using a SAFT - Bee Token did a $50K minimum - very common now. This Pre-Sale is open to anyone but people in the U.S. have to be "Accredited investors only" and go through strict KYC/AML, etc. This is usually followed by 2) A public sale where U.S. investors are NOT allowed but the minimum is lower.

There are also companies now that help you do all of this for a hefty fee - but one which may be worth it if you are projecting 10's of Millions. SAFTLaunch is one of those.



This is an evolving market. There was a time only a few months ago when token sales in the U.S. would just try their best to characterize their tokens as "Utility" only but some of these have received class action lawsuits because they failed one prong of the Howey Test in which "solely on the efforts of orthers" is invoked because the networks/platforms were not built yet - and were to be built with the proceeds.  That's a classic Howey Fail and is the major basis of at least three class actions currently in the courts now.  So, the "utility" argument has mainly been abandoned in favor of the SAFT.

I would actually like to know what the SEC thinks about these recent sales using SAFT, etc. It has not been legally tested. We hear a lot from the SEC Chairman lately, and we see some actual legal and enforcement actions - but we don't have a specific read (yet) on how they feel about the SAFT model. 

Will surely be interesting.

It is really hard to be exempt from Sec requirements. Munchee described the mechanism of token value growth and claimed that proceeds will be used to fund  operations and business development - just like every single company does

Most of the ICOs try to classify themselves as utility tokens and seek exemption from SEC registration requirements. But SEC recently banned an ICO from Munchees, even though Munchees treated their token (MUN) as utility and not as security.

If your token is really a token (and not disguised as token instead of securities), you are exempt from SEC requirements.

And what would be the process and requirements to the company and tokens?

In order to sell securities to the public in the USA, including some crypto assets, you either need to register your securities with the sec and issue a prospectus or you can only sell to accredited investors.

I have not looked at overstock or kodak but I’d venture to say that since they are large companies they spent the $500k or so to register their securities

Have some legal questions regarding SEC compliance and legalities of launching an ICO from the United States of America.

Kodak & Overstock have successfully launched ICOs.

Any attorneys want to participate in discussion of the protocols similar to the stated companies and requirements to mirror their success?



Thanks in Advance.