Often driven by FOMO, or the “fear of missing out,” many entrepreneurs jump on the ICO bandwagon by drafting a whitepaper, assembling their team, calling up advisors, creating their token, and even getting marketing and PR involved. Worse yet, in the mad rush to get their ICO up and running as quickly as possible, some entrepreneurs go so far as to begin raising pre-sale funding before even asking themselves what is probably the single most important question in the entire process: “Am I doing something illegal?”
DO NOT wait until the last minute—when you are just about to launch your ICO and you’re already under intense pressure—to start thinking about the one thing that could substantially delay or even completely derail your entire project. If you’ve already raised money and your token doesn’t align with the applicable regulatory environment, you may be in trouble. Even in the most optimistic of cases, if your ICO is found to be noncompliant, you may be required to return funds to investors. On the other hand, if you haven’t yet raised funds but you are about to launch the ICO and want to make sure you’re compliant, it can take up to six months to receive interpretive advice or a non-action letter from the U.S. Securities and Exchange Commission, hence interfering with your plans and delaying your planned ICO considerably.
So, if you are planning an ICO (also known as a Token Generation Event or “TGE”)—and you happen to be a U.S. citizen, a U.S. resident, your team is based in the U.S., or you’re planning to offer tokens to U.S. users—start your ICO journey by asking yourself these three crucial questions I’ve come up with (which you can read more about in my article here):
- Is my token an investment vehicle?
- Does my token have utility? Or even better, does it have exclusive utility?
- Is my TGE/ICO being used to access something concrete?
After asking yourself these three questions, I encourage you to read a document entitled “A Securities Law Framework for Blockchain Tokens,” which was created as part of an initiative of Coinbase, Coin Center, Union Square Ventures and Consensys, and published on December 7, 2016. This document is a great way to begin thinking about your token in the context of the current regulatory environment and start understanding whether your current token model might be considered a security. A link to the document is included below:
As mentioned in other posts, if you feel that your token might be considered a security under the “Howey test,” don’t risk it. Either pivot to a new token model or consider converting the token to a security by filing for Reg. D or Reg A+ status with the SEC. Doing so can be time-consuming and expensive, but will end up saving you a lot more time and money in the long run if you “roll the dice” and get in trouble with the SEC after the fact.