Blockchain has become a hot technology across a wide range of industries. In Silicon Valley, where hot and buzzy technology is a way of life, many businesses are diversifying their business by breaking into blockchain and creating blockchain-based solution. An Initial Coin Offering (ICO) has become the latest popular method of funding businesses and breaking into blockchain. Because regulatory agencies like the SEC or IRS have give unclear or little guidance with regard to digital coins or tokens, it can be difficult to know if an ICO might be right for your business. It is also important to consider other financing options before diving into the relatively unregulated, murky world of the SEC’s regulation of ICO’s.
Why Companies Like ICOs
ICOs provide many benefits to companies seeking financing. Many ICOs do not offer investors equity or voting rights, and this allows owners to retain greater control over their own business operations. Additionally, ICO’s provide companies with the capital to develop a blockchain-based platform and token that will provide data, information or services, and thus ultimately take advantage of blockchain’s innate qualities of being decentralized, immutable, and secure. Thus, fundraising through an ICO can be an effective way to reach funding goals and enhance the value of a company’s product or services. Forbes reports that less than 1 percent of startups seeking traditional funding do so through angel investors. Less than .05 percent receive venture capital funding. But among ICOs, 25 percent of businesses reach their funding goals.
Of course, no financing option is immune to risk. There are important downsides to ICOs which business owners should carefully consider before making any financing decision. For example, companies looking to do an ICO must be weary of regulatory risk from the SEC, IRS, FINRA, and the CFTC, plus the risk of private or class action lawsuits by unhappy investors. It is important to have experienced corporate counsel familiar with securities law and blockchain company to help your company maneuver through the regulatory landscape.
The ease of access and unclear legal regulations mean that ICOs attract a lot of scammers. This leads to an overall decrease in confidence in digital currencies. Like any economic system, digital currencies rely on users’ faith that the system holds value. A lack of confidence impairs the value of the entire system. This hurts both investors and companies. Like any business decision, there are pros and cons to ICOs. Business owners must carefully evaluate their goals in order to determine whether an ICO will meet their specific needs.
What the Securities and Exchange Commission Has to Say About ICOs
Any company considering an ICO should consult with an attorney about their legal obligations to the SEC. Many ICOs do fall under the SEC’s jurisdiction. This depends largely on the present and actual utility of a company’s token and whether there are any equity or voting rights associated with the token.
The exact parameters of ICO rules are still being developed, but in general, the SEC is harsh on market professionals who are deemed to have taken advantage of investors. The SEC also reports that it is actively protecting investors from unregistered or fraudulent ICOs through enforcement actions and trading suspensions. In short, ICOs offer many exciting financing possibilities for business owners. They are, however, new and unregulated, and this can make them risky. Business owners should carefully assess these risks and understand their obligations under federal securities laws before engaging in an initial coin offering.
Work with California Blockchain and Cryptocurrency Attorneys at The Startup Company Counsel
The experienced corporate attorneys at Startup Company Counsel help business owners enter the cryptocurrency market with protection for their legal and financial interests. Schedule a consultation today by calling (408) 441-7500, or send contact us online.