Okay, the crypto market has recently plunged and is struggling to regain upward momentum, but the technology that it is based on is not going anywhere. That is because the distributed ledger technology is incredibly useful for ensuring the crypto currency cannot be counterfeited. Today, distributed ledger technology has broad applications across several industries. It is becoming more commonplace for start-ups and businesses to establish funding by using an initial coin offering (“ICO”). These are both similar and dissimilar to common securities. In some cases, ICOs actually count as securities. In other cases, they do not. This can create legal snarls for those who choose to use ICOs to fund projects. In this article, we will discuss ICOs and how they work under U.S. law.
What is an ICO?
An ICO is an IPO that uses cryptocurrency and technology. Typically during an ICO, a company can raise money by creating a website and publishing a white paper (a document that describes the project). Investors exchange cash or cryptocurrency (e.g. Bitcoin or Ethereum) for digital tokens that the startup has created. However, not all ICOs are the same and this is where it gets tricky for some businesses that accidentally find themselves facing a securities fraud lawsuit because they mismanaged their ICO.
The laws and regulations that apply to an ICO depend in part on whether the token offering is a financial product like shares in the company. Only some ICOs are considered securities, for example, equity token that provides an ownership stake in the company. Investors of equity tokens are buying an ownership interest in the venture. Other ICOs offer special options or rights or access to products. The latter are not considered securities and are not currently regulated. While the former is regulated by the SEC. This has created confusion among investors.
The terminology employed by the experts is Equity Tokens and Utility Tokens. Equity tokens offer shares of the venture while utility tokens offer special access to the company, the right to purchase company products at a discount, or the right to purchase stocks at a discounted rate at a later time.
ICOs are controversial only because some have fraudulently sold utility tokens as equity tokens. While some have turned an enormous profit on ICOs and many businesses have established themselves through ICO funding, it is still a bit of a Wild West and there is a lot of confusion over the tokens themselves and what rights investors have when purchasing these tokens.
The future of crypto may not be currency
The reason why crypto is wildly unstable is that it is not useful as an actual currency. Transaction speeds are quite slow and would only become slower once they are scaled to a modern economy. The costs related to the transactions are also exorbitant as they require “mining.” Anyone who provides the hardware to mine the currency gets a share of the transaction.
Nonetheless, the sky’s the limit. In the future, you may be able to place valuable commodities in your wallet and purchase gasoline with them. Imagine using your Mickey Mantle rookie card to purchase groceries. Crypto allows fractional trading on commodities that allow you to borrow against valuable assets.
Talk to a Los Angeles Corporate and Securities Attorney Today
Want to launch an ICO? Carbon Law Group can help. Call today to learn more about how we can help you establish funding for your project and avoid legal pitfalls that derail ventures.