On Monday, September 5, 2017, China banned ICOs. Last Thursday, August 31, 2017, FINRA issued an investor bulletin related to ICOs. These events follow earlier government commentary from the SEC including a July 25, 2017 Investigative Report, a July 25, 2017 Investor Bulletin and an August 28 Investor Alert. ICOs are primarily used by startup companies developing a new platform in the blockchain (distributed ledger) world.
ICOs are the practice of raising funds from investors by offering a new virtual coin or token that will be usable in the new company’s platform. In exchange for the new company’s token the company usually receives virtual currency that has present, liquid value—like Bitcoin. These startup companies usually produce a white paper describing how the new platform will work and how the coin or token will be used within it. However, more often than not, the company has no platform currently in the market. For example, Filecoin aims to create a marketplace for unused computer memory.
The ICO related to Filecoin reportedly raised $187 million in one hour and, combined with earlier financing, over $245 million in total. Recent developments make clear that securities law applies to these offerings. Though some offerings may be structured in a way to avoid it, thoughtful companies, like Filecoin, are securing counsel to conduct an ICO that comports with securities laws and regulations, including through use of 506(c) Regulation D offerings.
The technology, the fundraising strategy and the application of the law to it are all in their relatively infancy. If you are an investor or raising capital in this fashion, then you need to pay attention to SEC, FINRA, and other governmental action. While the US regulators are taking measured steps in contrast to China’s ban, they are reviewing and providing guidance on these novel issues.