The US Securities and Exchange Commission has released a guide to ICOs on its website, announcing the move with a post on its Twitter page.
ICO stand for initial coin offering. This is a vital phase in the launch of a blockchain company.
In order to function, a blockchain requires users to hold its tokens. An ICO is the means by which the tokens are distributed. It also serves as a way for companies to raise funds. Because of the hype surrounding blockchain technology over the last couple of years, some ICOs have raised money amounting to billions of dollars.
An additional result of the hype is that a lot of people have lost money by purchasing tokens from operations that are incompetent or fraudulent. Fraud has been especially prevalent because in most places laws do not yet exist to govern behaviour in this area of investment.
Financial authorities worldwide have also discovered that writing appropriate laws is not simple – thus far, governments have largely failed to satisfactorily define what an ICO is exactly. This is partly because different tokens have different uses. Some are meant to be used as currency, some are meant to be used in exchange for a service provided by their issuers, and some can be seen as representing ownership shares in the business.
In cases where tokens represent ownership shares, they would fall under securities laws, and in the US come under the jurisdiction of the SEC. Ripple, for example, is currently facing a lawsuit because it has been accused of selling unregistered securities. The company denies that its tokens should be thus defined.
However they are defined, it is necessary that the investing public make informed decisions about where to put their money, especially in a realm which is at best only partially regulated.
The three Rs of ICOs
Not reading, writing and arithmetic, but risks, rewards, and responsibilities, according to the SEC.
The new page explains that:
– ICOs that are securities need to be registered as such.
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– Not all tokens are securities, but some seek to mask their true nature through mislabelling.
– ICOs are risky.
To investors, it says:
– Cryptocurrency is borderless in nature, and so the protection that a local financial watchdog (such as the SEC) can afford is often limited.
– Investors must be extremely cautious, and be sure to do their homework as regards their investment. They should look at the business model and the team behind the ICO to assess its regulatory/legal status and business feasibility.
To issuers of ICOs, it explains that it is their responsibility to decide if their product is a security. This is equally true of businesses that facilitate the trading of tokens – if they are securities, the exchange must register as a securities exchange.
A few weeks ago, the SEC released a page featuring a mock fraudulent ICO in another effort to educate the public as to what to watch out for.
On the 30th of May, the canton of Geneva released a guide for ICO issuer aimed at supporting and guiding their projects. It is in line with guidelines issued in February by the Swiss financial authority, FINMA.
Like the SEC, FINMA recognised that tokens can fall into three categories, and decided that it would classify projects on a case by case basis.
The guide is a 12-page document that gives practical information on legality, regulation, and tax, as well as explaining the requirements for a successful team and technological blueprint. It also features a guide to marketing and public relations strategy and a map of Geneva with relevant blockchain venues marked.