Q4 2018 Legal Outlook: ICOs and Regulations

Each quarter, He3Labs COO and General Counsel Sean Whyte shares blockchain and DLT insights in the context of  the current legal landscape. Leading legal advisement amongst the nimble collective of elite blockchain experts at He3Labs, Sean works alongside his team to assess, architect, and develop complete blockchain solutions for real-world businesses.

A company that raises money through an ICO offers coins or tokens associated with its business to investors in exchange for money, typically paid in cryptocurrencies.

A Look Back at 2018: Rampant ICOs Despite Threatened Regulation

According to CoinDesk’s ICO Tracker, more than 60 different organizations had open initial coin offerings (ICOs) in the month of July. Each open ICO raised over 19 million dollars.  

The coins offered to investors through an ICO are often ERC20 tokens that are immediately tradable on open cryptocurrency markets. Such ICOs continue to flourish even seven months after the Securities and Exchange Commission (SEC) Chairman Jay Clayton’s statement to the United States Senate that “I believe every ICO I’ve seen is a security.”

Like many high-profile stories, the tales of large amounts of capital raised are front page news, while the reckoning is relegated to the back pages and often ignored. Make no mistake, the reckoning is here.

Q3 State Enforcements and Federal Agencies Bring Further Uncertainty

Just this week, the Colorado ICO Task Force took action against three companies charged with conducting fraudulent ICOs.

Colorado is not the only state taking action, Massachusetts, New York, and Georgia have also initiated enforcement actions against ICOs. Couple these state actions with the activities of the federal agencies that regulate various aspects of ICOs, such as the SEC, Commodities Future Trading Commission, U.S. Treasury, and the Internal Revenue Service, and the level of regulatory attention on ICOs becomes very clear.

The tremendous opportunity for blockchain and greater distributed ledger technology (DLT) to provide new ways for companies to raise money and for investors to invest should not be lost in the rush to generate capital by completely ignoring established securities laws.

What’s Next: Compliant Fundraising with Tokenized Securities

DLT offers many opportunities to democratize investing and open new pools of investment in a way that improves regulatory compliance. For instance, distributed ledger technology already allows investors to buy and trade cryptocurrencies and securities on public exchanges in ways impossible before the advent of the technology.

Many companies are working on ways of using these exchanges to offer new types of investment, such as real estate investment pools that have, up to now, not been available to investors. Most importantly, the technology provides ways of building regulatory compliance into the new exchanges that will provide investors with full information in a regulatory compliant environment. Such exchanges will form the foundation of a new wave of capital formation that complies with already established securities laws.

ICOs will continue to make headlines while the reckoning goes on largely unnoticed, at least for the moment. In the background, the legal ways of raising capital that are made more efficient, effective, and compliant by DLT have already taken form through tokenized securities.

NewsBrian TinsmanICO, SEC