UK is also
contemplating regulating ICOs. Singapore, USA, and Canada
have also warned.
Most start-ups would not have the resources to comply with regulations and therefore, they can only take money from friends, family and accredited investors. This means that if ICOs are regulated, most people would not be allowed to invest.
Incorrect on both points. First,
friends and family as investors aren’t exempt from securities regulation. Secondly, there is crowd funding of equity now with
Regulation A (
SEC) and
Regulation CF (
SEC). Crowd equity that targets non-accredited investors requires thorough disclosure on par with what would be disclosed if registering securities.
A downside with these crowd equity paradigms for non-accredited investors is that they are more or less country specific. Regulation CF requires that the company funded must be incorporated in the USA, and it selling to other countries may not be possible, e.g. to UK investors. This gets to be quite a mess to raise funds from people all over the world:
https://www.paulhastings.com/publications-items/details/?id=9c59e969-2334-6428-811c-ff00004cbdedWe were contemplating to do a
crowd equity round at launch of our project (which would be 100% legal). You would not get tokens, rather restricted shares which receive a dividend when pre-mined tokens are sold in the future by corporation (sold only when there is no longer any investor expectation dependent on the efforts of the corporation). It requires long-term investment. It removes the scammy pump & dump aspect. Short-term speculators can buy the tokens on the open markets if they prefer, and these are not issued in exchange for money, thus are not securities. But an additional downside is that most investors want to take their gains as capital gains (for tax planning flexibility), so they’d want instead of dividends to have an IPO, but the regulation of IPOs is rather onerous.
If we go that route, we’ll likely end up in some regulatory or lawsuit “purgatory” (i.e. gridlock clusterfuck) down the line. It is a huge mess that we need to avoid.
The reason we would not offer tokens via crowd equity, is because the tokens would then be restricted securities, not tradeable, and even if later registered, then only tradeable on regulated exchanges:
And the growing use of private placements like the Reg D structure is something investors should note. Namely, it means that the next generation of tokens could be securities in the view of U.S. regulators.
Thus we’d separate the investment in shares from the investment in tokens. Tokens are issued without taking money, so they are not securities and can traded legally. One way to issue tokens without taking money is to have a competitive proof-of-work mining. STEEM showed another way to issue without taking money via onboarding; and we’ll have a different onboarding variant.
Bad news for pumpers and scammers. Their party is going to be crashed by the regulators. Their ill-gotten funds will be clawed back. Always in life, crime does not pay.
Those who have issued or promoted ICOs (i.e. participated in signature campaigns thus are affiliates), I suggest getting an attorney asap. You’re not going to like what is coming.
The paradigm is changing. We anticipated this since 2015 and warned everyone. But of course most people ignored it.
Yet we are still not comfortable with any of the legal means to raise funds. So we’re still looking for a different model that can also be legal and avoid making the tokens securities.
Note for raising early stage seed capital from a small number of angel investors, then
Regulation D (which
provides safe harbor) is normally used as an exemption from SEC registration of the securities (and similarly in other countries such as Canada). Specifically
Rule 506(b) because it eliminates the need to register in every State where there is an investor. The only requirement is to file a simple report with the SEC and in every applicable State. Of course there are similar reports to be filed in other countries (such as
Form 45-106(f1) in Canada) where there are investors.
The main point is that registration is very onerous with requirement of very thorough and strict disclosure, which consumes considerable cost, effort, and risk to the issuer of being sued or prosecuted for omitting or misleading material facts of disclosure. Thus it is desirable for early stage fund raising to be offered only to accredited investors and only offered privately (no public advertising of the offering). In this way, only the anti-fraud aspects of disclosure apply. And there is no registration, only a simple filing of summary form.
Note that investors which are
bona fide directors or officers of the corporation
are considered to be accredited investors, even if they would otherwise be non-accredited (but this can not be used as a scheme to sell investment to non-accredited investors who do not offers skills to the corporation which do not justify their legitimate appointment as directors or officers). But under Securities Act
Rule 4(a)(2) these
must be registered with each respective State, unless they are being given away and not sold.
Recently it became much easier to resell
restricted (even “control”) shares, and accredited investors can apparently purchase restricted shares from other accredited investors directly. Yet that still is quite restrictive for those who want capital gains and not dividends.
Disclaimer: IANAL. This is not legal advice.
