Lawyers for Initial Coin Offerings (ICOs)
Experienced Cryptocurrency Team
Do you need advice launching your ICO? Are you worried about SEC compliance? Do you need legal assistance structuring your offering as a utility token or a security token? Then, you need the specific assistance of an ICO attorney.
ICOs are public offerings of digital assets that are stored on blockchain technology. They can be extremely beneficial for companies seeking to access capital fast.
That said, ICOs are a complex undertaking and are not well understood. The SEC and other federal agencies are increasingly scrutinizing ICOs as potential sources of fraud and abuse.
This puts your business at risk. Along with the reputational harm that results from a federal investigation, receiving a summons, subpoena, or other demand from the SEC can lead to penalties, disgorgement orders, injunctions, and sometimes criminal penalties and jail time.
It is time to act first and think proactively. Hiring an ICO attorney can help you avoid these consequences. At Oberheiden, P.C., our attorneys and consultants are trained in assisting clients with all aspects of an ICO.
We strive to stay abreast of legal and regulatory changes affecting cryptocurrencies and blockchain technology as applied to ICOs. Our team can help you structure your ICO to avoid SEC registration or can work with the SEC in launching an SEC-approved ICO. Our ICO attorneys will also vigorously defend you against federal investigations into your ICO.
Do not let your business innovations get to the federal investigation stage. Stay on top of the game. Contact Oberheiden, P.C. today for a free consultation.
Intro on Cryptocurrencies and Blockchain Technology
Cryptocurrencies are digital representations of assets. They are decentralized—meaning that they operate without government or third-party interference on peer-to-peer networks.
The first cryptocurrency was Bitcoin. Bitcoin was created in 2008 by developer(s) under the pseudonym Satoshi Nakamoto and first launched in 2009. It quickly gained popularity because of its low transaction fees, speed, and pseudonymity.
Cryptocurrencies that came after Bitcoin are called Altcoins. Examples of Altcoins include Ethereum, Litecoin, Bitcoin Cash, Cardano, Stellar, and Monero.
Crypto transactions work on blockchain technology. The blockchain is a decentralized ledger distributed across many computer nodes. It is decentralized—meaning that there is no governing banking or government authority.
Every transaction—or block—is linked to the prior one to form the blockchain.
What is an ICO?
Many start-ups and individuals are using blockchain technology and peer-to-peer networks to launch their ICOs—initial coin offerings.
Think of an ICO as an online IPO that uses digital assets to raise money. In any event, unlike an IPO, ICOs are operated without federal oversight and are stored on the blockchain.
ICOs raise capital by using peer-to-peer networks in online transactions. They can be launched by anyone with an idea, Internet connection, and a little cash.
This can be good to help companies get the capital they need to grow their business without having to find angel investors or venture capitalists.
That said, the ease in launching an ICO males them a key area of focus for the SEC.
Why Does the SEC Care So Much About ICOs?
Many ICOs are launched without registering with the SEC. Whether the launched coin or token is a “security” is an unsettled issue and differs from case to case. It is one of the most controversial issues for the SEC today.
That said, failing to register with the Commission or meet an exemption where your ICO is considered a “security” can lead to a federal investigation for unregistered securities.
The SEC is concerned about coin offerings because there is a great potential for fraud, market abuse, and insufficient investor disclosures. Pump and dump schemes, online black market dealings (e.g., Silk Market), money laundering, and illegal online wires are very common when using cryptocurrencies.
Even though there is not a reliable legislative framework for regulating ICOs, federal agencies such as the SEC are relying on already-existing statutes for their investigations.
For example, the SEC investigates fraud and unregistered offerings; the IRS looks for instances of tax evasion or filing false returns involving “virtual currencies;” and FinCEN analyzes for the failure to implement compliance programs with sufficient AML/KYC policies under the Bank Secrecy Act.
Other agencies involved include the CFTC for commodities fraud and also the FBI and DOJ where criminal activity is also present.
What is the Howey Test?
The Howey Test is the test used by the SEC to determine whether an offering—including a digital offering—is an “investment contract,” or a security.
If it is a security, the individual or company issuing it must register with the Commission or proceed under an exemption. If it is not a security, the offering need not be registered at all.
The Howey Test goes all the way back to a 1946 Supreme Court opinion—SEC v. W. J. Howey Company. In that case, Defendants were selling citrus groves and allowing the owners to lease the land back to Defendants to cultivate the fruit and sell them for a profit on behalf of the owners.
The SEC brought an action for “unregistered securities offering” against Howey Company (defendants). The case went to the Supreme Court.
The Supreme Court held that if an asset satisfies all of these four conditions, it is an “investment contract,” or security, and must comply with the federal securities laws:
- An investment of money;
- In a common enterprise;
- With an expectation of profits; and
- That are derived from the efforts of third parties
More and more companies are launching ICOs. The SEC will continue to use the Howey Test to determine whether these ICOs are illegal unregistered offerings. The SEC will waste no time investigating unregistered ICOs or ICOs with alleged instances of fraud.
Utility Tokens versus Security Tokens
An ICO can involve either a utility token or a security token. This distinction is important because only offerings of security tokens need to be registered with the Commission—not utility token offerings.
Both utility and security tokens are digital asset offerings stored on blockchain technology as a permanent record. What’s the difference?
Utility tokens give users the ability to use the token for the purpose that the coin was created for—much like an arcade token. Utility tokens cannot be used as currency or trading purposes other than those within the company’s “closed ecosystem”—like an app.
The value of a utility token is not tied to the value of the company issuing it. In fact, there is no correlation between the company’s success and the success of the utility token. Utility tokens increase in value based on market conditions—the supply and demand for the token.
On the other hand, security tokens are basically representations of a digital investment in a company. They are ownership tokens much like traditional shares—except that they are transferred and stored on the blockchain.
The value of security tokens is tied to the value of the company. If the company has a good year with healthy profits, the value of the security token will also increase—also similar to traditional shares.
In other words, security tokens need to be registered with the Commission since they “pass” all elements of the Howey Test. On the other hand, utility tokens do not require registration since they seldom involve an expectation of profits based solely on the efforts of third parties.
The SEC draws a very fine line between these two tokens. This can be crucial if you are trying to create a utility token, but the SEC instead classifies your offering as a security token—then you would have to register and comply with all ongoing disclosure and reporting obligations.
If you need advice on structuring your coin/token offering in either of these categories, give us a call today.
Need Advice with ICOs?
ICOs developed from financial innovation and technological advances as well as to provide a means for start-ups to raise capital without the burdens of SEC registration.
In any event, because ICOs are loosely—if at all—regulated by the federal government, the SEC has taken up the task of investigating ICOs. And ICOs will continue to receive increased attention from the SEC.
If you need legal advice on your ICO, then give us a call today. We can help you through the launching stage of your ICO, structuring your offering to your advantage, and defending you against federal government investigations involving your ICO.
Contact us today for a free consultation to protect your reputation, secure your future, and finalize your ICO.