If you are reading this, you are probably already aware of the explosion in blockchain technology and digital currency – not just as a tool for financial transactions, but as a capital-raising tool for new businesses through Initial Coin Offerings (ICOs).
And while interest in blockchain investing has grown exponentially, there still is enormous confusion about the legality of ICOs, especially after recent regulatory actions.
Aspiring blockchain entrepreneurs must carefully manage the legality of their ICO, not only to increase investor confidence and trust, but to avoid problems with compliance and securities laws, which can have a devastating impact on businesses, their reputations and their finances.
Here are five simple steps to ensure your ICO is a success:
1. Determine What Your Technology Is
Obviously, the first critical step for you and your team is to understand how blockchain technology will function as part of your business, and what exactly you intend to offer clients and investors with the technology.
This is clearly tied to the core of your business – you want to offer clients something of value – but there are key legal ramifications that will impact your decision about which technology you choose and the platform on which you offer it.
How your company accepts cryptocurrency, maintains it, and provides information to clients and investors is critical to the compliance process and should be determined by the legal framework that applies to your ICO.
2. Understand the Securities Laws Affecting Your ICO
The term ICO is thrown around as a buzzword quite a bit, most likely because it sounds like IPO (initial public offering).
But what aspiring ICO entrepreneurs might forget is an IPO is a heavily regulated process – at least in the U.S. – requiring mandatory disclosures both before and after the offering; limitations on what company insiders can do both prior to and following the offering; and hefty penalties, fines and potential lawsuits for those who don’t follow the rules.
Is every ICO just like an IPO? Not exactly. But any U.S.-based investment scheme spanning state or international borders – whether offered publicly or only to select investors – is likely to be subject to federal securities laws, and possibly even state laws
It is imperative to go through a detailed legal vetting process using attorneys well-versed in blockchain technology and securities law. You must have a thorough understanding of what statutes govern your ICO and how to comply with those laws.
3. Choose a Jurisdiction for Your ICO
With U.S. securities laws applying to ICOs in all 50 states, bear in mind that you can launch your digital currency outside the country, perhaps a locale with simpler, more straightforward rules and regulations on cryptocurrency.
Other countries may offer more favorable regulatory frameworks, such as a wider pool of eligible investors and fewer or less detailed disclosures.
Additionally, other countries may offer advantages through preferable tax treatment and fewer penalties for non-compliance, as well as greater restrictions on lawsuits that can be brought against your firm. Gibraltar, Singapore and Switzerland are among the places outside the U.S. ideal for launching ICOs.
But choosing a jurisdiction that benefits your firm at the expense of potential investors could backfire by scaring off potential investors who would be more comfortable with a more rigorous regulatory and legal framework.
4. Create Your White Paper with Eye Toward Securities Laws
Your white paper will present details on how your cryptocurrency technology works. This document’s goal, of course, is to increase confidence and trust in potential investors. But it should include legal statements regarding the securities laws and related regulations that will apply to your ICO.
While a white paper might not technically be a prospectus, the statements you make can result in securities law violations, which can invite government enforcement and civil lawsuits. The Securities and Exchange Commission heavily cited a digital currency provider’s white paper when it moved to shut down the company’s ICO in December.
5. Maintain Compliance with Securities Law and Money Laundering Standards
After the conducting the ICO, you will still need to comply with the regulatory/legal framework of the jurisdiction in which the launch occurred, and potentially other jurisdictions where your digital currency is marketed and sold.
Jurisdiction will dictate the information you’re required to disclose and the restrictions on what you can say about your cryptocurrency – for example, U.S. regulators don’t tolerate ICOs guaranteeing returns.
Regular formal filing requirements will also likely exist. And most countries have anti-money laundering laws (sometimes called AML laws, or KYC laws – short for “know your customer”) with which compliance is paramount.
The bottom line is ICOs require a very complicated, legal process. They function as the foundation of a burgeoning digital currency industry. But that industry is no longer the unregulated Wild West.
U.S. regulators have already put ICOs on notice, and China and South Korea have even banned them outright.
To ensure long-term success, your ICO must be carefully planned, fully vetted and built on a foundation of compliance with securities laws in its jurisdiction.