Five Things to Know About ICOs
Initial coin offerings or similar types of sales of virtual-based coins and tokens, are quickly becoming an important fundraising tool for many early-stage companies. Last month, our QuickLaunch University webinar series focused on initial coin offerings and recent developments for . Here are five key takeaways:
- While an ICO raises funds, the
coins are not typical currency.
Instead, the coins or tokens purchased in an initial coin offering can be
used to transfer value within the new coin's ecosystem or to other
cryptocurrencies' ecosystems, and so may represent other rights or
functions as well. It may give the holder a right to purchase the 's
products or services, for example.
- Starting an ICO is not unlike
starting a venture.
Entrepreneurs and that want to launch an initial coin offering
typically create a company, announce their plan to launch a token sale,
and then they publish a white paper about what they intend to create, how
they intend to do it, and how much money they're going to need to make it
- ICOs are also similar to an
initial public offering
in that the tokens are typically sold at a fixed price by the , and
then they're traded on after issuance. Laws of supply and demand
determine the price on the after the initial issuance.
- But remember that the US
securities laws may apply. The SEC made clear that traditional securities
law analysis applies to new technologies
in its recent Report of Investigation on the DAO. Read our July client alert for more
information. And the SEC just this week
shut down an ICO fraud that it deemed to be a securities offering—you can read the press release here. If you're selling something that has the
characteristics of a security, it is going to be subject to the SEC's
- The SEC did not say that every initial coin offering is a securities offering. But if a securities ICO is not registered with the SEC and it does not meet the requirements of an exemption from registration, then that would be an illegal securities offering. The consequences of a violation could be major fines, penalties, cease and desist orders that could essentially put a company out of business, and/or potential liability for the individuals running the company or involved in the offering. Before you consider floating an ICO, seek out experienced counsel to understand the legality of token and virtual currency transactions to determine if this is the right approach for your venture.