Recently, the North American Securities Administration Association (NASAA) issued a serious warning for all would-be investors. The statement refers to a survey of state regulators, and it finds that 94 percent of cryptocurrencies involve a “high risk of fraud.” In fact, NASAA identifies ICOs as “emerging investor threats for 2018.” In other words, a startup considering an ICO is very likely to be facing considerable regulations during your ICO, from both regulatory agencies and risk of private lawsuits or class action suits from individual investors.
Startups and businesses looking to move to the blockchain and put on an ICO face an array of complicated regulations and unclear guidance from a number of large, powerful regulatory agencies. Most notably, startups must deal with the Securities and Exchange Commission (SEC), state securities agencies, Internal Revenue Service (IRS) Financial Industry Regulator Authority (FINRA), Commodity Futures Trading Commission (CFTC), and FinCen on anti-money laundering laws. The long list of regulatory agencies can and should be very intimidating to a startup considering an ICO. However, startups should seek out experienced corporate transactional attorneys, focusing on blockchain companies and securities law, like the attorneys at Startup Company Counsel.
Accordingly, it is critical to receive legal counsel that considers your business and its business, technology, and legal needs when doing an ICO, especially with regarding to securities law enforced by the SEC and state securities agencies.
The SEC and The Howey Test
The Howey test is a test constructed by the U.S. Supreme Court, and the test determines whether or not certain transactions qualify as an investment contract and thus must be registered (or exempted) with the SEC. Specifically, the key question is whether a transaction “involves an investment of money in a common enterprise with profits to come solely from the efforts of others.” The SEC has shared that it will be applying the Howey test to those companies engaging in ICOs and that it will continue its traditional practice of doing so on a case-by-case basis, including looking at the facts and circumstances of each startup’s ICO. As a result, it is critical that a startup understand that the SEC will disregard form and look closely at the substance of an ICO to determine if it should have been registered (or exempted) from securities regulation.
The facts are thin on the ground when it comes to the exact regulations you’ll face during your ICO, but according to the Wall Street Journal, the chairman of the SEC recently relayed in a speech to the Institute on Securities Regulation that he’s yet to find an ICO that didn’t track as a securities offering. In translation, this means that your ICO will likely be held to either registering with the SEC or finding applicable exemptions.
Blue Sky Laws
Federal securities laws are only part of the securities law equation – additionally, any offering of securities in the U.S. (such as an ICO) must also comply with the applicable state’s security or blue sky laws. These state laws often incorporate a large part of the federal securities laws, but the state laws can also be more stricter than the federal securities laws. In California, the Corporate Securities Law of 1968 guides all offers and sales of securities. This California securities act applies a “risk capital” analysis that is more broadly inclusive than the Howey test, and that’s meant to safeguard the public from any fraud or deception regarding securities. If you’re based in California, it’s likely that your ICO offerings will be regulated with the same specificity that any other security would be.
If You’re Ready to Make an ICO, Contact a Skilled Silicon Valley Corporate Lawyer Today
If your California business is ready to raise money through a compliant Initial Coin Offering, you will face considerable regulations. Consequently, you should collaborate with legal counsel to synchronize your business, technology, and legal strategy into a compliant plan to maneuver the regulatory hurdles. If you’re ready to make an ICO, Startup Company Counsel in Silicon Valley, is here to help. Our dedicated corporate attorneys have the experience, skill, and knowledge to effectively and efficiently guide you through the regulatory process. Please contact us, email us at firstname.lastname@example.org, or call us at 408-441-7500 to set up a consultation today.