So you are considering your very own Initial Coin Offering?
Congratulations, you are entering a very exciting world, at a very exciting time.
There are three major factors you will want to consider before you go ahead with your venture.
Here’s a breakdown of each:
Selecting the right blockchain is absolutely key. You want your token to sell quickly and securely, you want to protect those who invest, and while there are no regulations yet, there have been several hard lessons others have learned.
Make sure to use a platform that is proven and tested. If you do accept multi-currency, ensure that those systems have been tested and have float in the market, so you don’t have less than what you need to get your job done.
Once you have vetted your technology and performed your security audits, the next step is legal and regulation. While each country may have its own specific rules and regulation to take into consideration, the elephant in the room here is the United States Securities and Exchange Commission. The issue here is that you may be hit with significant fines or worse for selling tokens defined as unregistered securities to US citizens or even if you are a US citizen or working from within the US (see SEC v. Traffic Monsoon). With the recent SEC issued warnings on ICOs, offerers are on edge, and rightly so. People are gambling their wealth and freedom in the rush to market. Don’t let yourself be the next object lesson I cover here.
There are two common paths when addressing the issue. Some choose to create a token in such a fashion that it can’t be defined as a security, while the rest assume that SEC regulations will apply and they work to assure that when they need to comply, they’ll be ready to do so.
It is best to call the fundraising instrument a token issuance instead of an ICO, as it helps to convey the message to potential investors that this is not an IPO. At the end of the day, it is about the descriptions, the disclaimers and the explanation of what the token does and how this is being conveyed to users and investors. Consumer and investor protection starts with an expectation of accurate disclosure.
Acting in good faith, with full transparency and proper disclosures, will reduce the risk of any sort of SEC enforcement. There is no way to be 100% sure until the regulations become available, but if you shun away from anything that feels like a scam, it seems like the odds will be in your favor.
While the popular choice for many companies performing ICOs is to block the US altogether or to design the tokens in a way so that they pass the Howey test, which determines if something is considered a security, Ms. Carrington’s client, Minerva, is taking a new approach.
Minerva plans to “set precedent in following securities laws”, by assuming their token will be considered a security. They plan to sell to American Citizens using a private placement memorandum, under regulation D 506C, for accredited investors. This means that they will be performing KYC due diligence on any US-based investors to determine their accreditation status. This is the same regulatory exemption used by popular equity crowdfunding sites such as Angellist.
Once you have figured out the regulation and technology, does that mean you are ready for your ICO? Not yet. Days of writing a white paper and raising $10 million are already in the past.
Retain a firm that has experience in marketing to investors, as this is the same thing you’re looking to do. Don’t fall into the trap of hiring a fancy marketing firm that doesn’t know the first thing about marketing to investors, this is an easy way to end up with a huge marketing budget and little ROI.