\n<\/p>\n
An initial coin offering (\u201cICO\u201d) is the process of raising capital for a business by issuing a new coin or token. These funds are used to develop the company\u00b4s platform or other business projects. While ICOs are on the rise, the SEC has observed<\/a> that the technology behind them\u2014the blockchain\u2014is still in a novel stage with little to no regulation. As a result, ICOs represent a high potential for fraud due to the lack of consistent regulation compared to traditional capital markets. Further, in 2019, the SEC released its \u201cFramework for \u00b4Investment Contract\u00b4 Analysis\u201d<\/a> which helps companies determine whether they may have any registration obligations. If you are considering launching an ICO, then you need to consult an experienced ICO attorney to conduct a comprehensive evaluation of your compliance obligations under federal law. This article, drafted by the ICO attorneys at Oberheiden, P.C., considers these points.<\/p>\n An experienced lawyer can help guide you through your initial coin offerings (ICOs) launch in a way that is compliant with federal law, especially the federal securities laws. Below are five considerations to evaluate for your ICO:<\/p>\n This is probably the most important consideration. You will first need to determine whether your coin or token satisfies the SEC\u00b4s definition of security and therefore has to be registered or exempted. The SEC and courts use something called the Howey Test<\/em>, which was developed from a Supreme Court opinion<\/a>, to determine whether a digital asset or digital asset project is an \u201cinvestment contract\u201d or a \u201csecurity\u201d under federal law. This test has four prongs:<\/p>\n an investment of money,\u00a0<\/p>\n<\/li>\n in a common enterprise,\u00a0<\/p>\n<\/li>\n with the expectation of profits, and\u00a0<\/p>\n<\/li>\n derived solely from the efforts of others.\u00a0<\/p>\n<\/li>\n<\/ol>\n All four prongs must be satisfied for the coin\/token to be regulated as a \u201csecurity.\u201d Once the coin or token is a security, many companies proceed under a registration exemption such as Regulation D<\/a> by completing Form D<\/a> or Regulation S<\/a> (where the coin or token is offered and sold outside the United States). Where one or more prongs are not satisfied, the coin\/token is not a security but instead deemed one of \u201cutility.\u201d Utility tokens do not require registration because they are not securities in the first place.\u00a0<\/p>\n In addition to the stringent registration obligations that may be possible for your coin or token (digital currencies), the ICO project could entail additional registration, reporting, and other federal obligations. Once the coin or token is considered a \u201csecurity,\u201d the individual involved in launching the coin needs to evaluate whether their services to the public may require registration as a broker-dealer or investment adviser. This will depend on various considerations such as whether the individual is facilitating coin\/token trades or providing investment advice for a fee, respectively, but are nevertheless critical considerations every individual or company launching an ICO needs to thoroughly evaluate. Lastly, some companies use their online platform for launching and issuing ICO. In such cases, the platform itself may have to be registered as an exchange.\u00a0\u00a0<\/p>\n The SEC\u00b4s Enforcement Division continues to aggressively investigate blockchain companies involved in ICOs for allegedly engaging in fraudulent behavior, market manipulation, and other instances of misconduct under the federal securities laws. Most commonly investigated topics include those under the antifraud provisions or those regarding the offer and sale of unregistered securities.<\/p>\n Ancillary issues involve acting as unregistered investment advisers, failure to obtain a federal money transmitter license or failure to register the ICO platform as an exchange. SEC Chair Gary Gensler<\/a> in August 2021 compared cryptocurrencies to \u201cthe Wild West\u201d which requires an enhanced and reinvigorated investigative approach by the Commission. As a result, the SEC is using greater scrutiny concerning ICOs.<\/p>\n ICOs are complicated projects. They involve significant time, money, and manpower before launch, during launch, and after the token or coin\u00b4s launch. The registration obligations\u2014from the coin\/token and individuals involved to the platform itself\u2014require a thorough examination. Additionally, drafting and assessing legal services agreements and miscellaneous expansion plans can change the entire equation of \u201cregistration required\u201d versus \u201cregistration not required.\u201d An attorney can assist blockchain companies with their ICOs in the following ways, as examples:<\/p>\n Structuring and restructuring the offering to your business needs;<\/p>\n<\/li>\n Conducting a comprehensive legal, regulatory and compliance review;<\/p>\n<\/li>\n Assessing whether the coin or token is a security token or a utility token;<\/p>\n<\/li>\n Advising on compliance, including AML\/KYC obligations under the BSA;<\/p>\n<\/li>\n Drafting complex legal service agreements, PPMs, investment contracts, stock certificates and subscription agreements;<\/p>\n<\/li>\n Defense work including defending against federal investigations; and<\/p>\n<\/li>\n Assisting with tax preparation regarding the ICO.<\/p>\n<\/li>\n<\/ul>\n If you think your project may involve one or more of these services, then it is time to contact an experienced ICO attorney for legal guidance.<\/p>\n ICOs are offered to the public to fund new business operations. Whether the issued coin or token is one for \u201cutility\u201d or \u201cinvestment\u201d purposes, the technology behind them is still novel and presents many risks. The blockchain is the public distributed ledger that records all crypto transactions in a manner that is transparent, secure, and immutable. That said, because many crypto transactions are virtually untraceable, the potential for fraud, money laundering, market manipulation, and other crimes is still high. As a result, many federal agencies such as the SEC\u2014or the FBI\/DOJ where criminal conduct is involved\u2014have taken a keen interest in companies issuing ICOs.\u00a0<\/p>\n Further, federal legislation such as the Bank Secrecy Act<\/a> and the PATRIOT Act<\/a> imposes various obligations on certain companies to maintain reports and records for their customer\u00b4s transactions as well as more enhanced requirements such as compliance programs, training requirements, and annual reviews or audits. Some crypto companies may also have registration and licensing requirements such as those for MSBs under FinCEN for engaging in money transmission services.<\/p>\n \u00a0<\/p>\n \u201cCertain ICOs involve coins or tokens that would satisfy the SEC\u00b4s definition of a \u201csecurity.\u201d In such cases, the company would be required to register its coins or tokens with the SEC or qualify for an exemption. The failure to do so could lead to substantial civil and criminal penalties, injunctions, disgorgement orders, and reputational harm. To determine whether you have any registration obligations under the federal securities laws or other federal provisions, you should contact an attorney experienced in ICOs right away.\u201d \u2013 Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.<\/em><\/p>\n \u00a0<\/p>\n Initial Coin Offerings (ICOs) present great potential for small businesses and start-ups to raise capital quickly and with few entry barriers. That said, ICOs are inherently a risky endeavor due to the novel technology behind their operation\u2014blockchain technology\u2014and the lack of consistent and comprehensive federal regulation in the crypto\/blockchain industry. This presents an increased risk of fraud and manipulation. Before launching an ICO, consider the five points in this article and seek out the services of an experienced ICO attorney to advise you on federal compliance obligations. The lawyer’s knowledge of ICO will also play an important factor in launching ICO.<\/p>\n<\/p><\/div>\n5 Considerations Before Hiring an ICO Attorney\u00a0<\/h3>\n
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Your ICO project may involve SEC registration obligations if your coin or token passes the \u201cHowey Test.\u201d<\/h4>\n<\/li>\n<\/ol>\n
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If your project involves coins or tokens that are deemed \u201csecurities,\u201d you may have a host of other federal registration obligations.<\/h4>\n<\/li>\n<\/ol>\n
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ICOs represent an area of increased federal regulatory interest and scrutiny due to the novel technology and potential for fraud involved.<\/h4>\n<\/li>\n<\/ol>\n
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You will likely need an experienced ICO attorney to help you structure your ICO under the law and assess other more complicated issues before launch.<\/h4>\n<\/li>\n<\/ol>\n
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ICOs contain a very high risk of liability exposure due to the nature of ICOs and other federal provisions that may be involved.<\/h4>\n<\/li>\n<\/ol>\n
Conclusion\u00a0<\/h3>\n