Hiring an Initial Coin Offering Lawyer Under SEC Regulations

Introduction: What is an ICO?

An initial coin offering (“ICO”) is the process of raising capital for a business by issuing new coins or tokens. The funds are used to develop corporate platforms or other business projects. As my ICO increases, The SEC has observed the technology behind them — blockchain — is still at a novel stage with little or no regulation. As a result, ICOs represent a high potential for fraud due to a lack of consistent regulation compared to traditional capital markets. In addition, in 2019, SEC releases “‘Investment Contract Analysis’ Framework” which helps the company determine whether it has registration obligations. If you are considering launching an ICO, you should consult with an experienced ICO attorney to conduct a thorough evaluation of your compliance obligations under federal law. This article, compiled by an ICO lawyer in Oberheiden, PC, considers these points.

5 Considerations Before Hiring an ICO Attorney

An experienced attorney can guide you through the initial coin offering (ICO) in a manner that is compliant with federal law, particularly federal securities law. Here are five considerations for evaluating your ICO:

1. Your ICO project may include an SEC registration obligation if your coin or token passes the “Howey Test.”

This is probably the most important consideration. You must determine if your coin or token meets the SEC’s definition of security and therefore must be registered or released. The SEC and the courts use something called Howey Testdeveloped from the opinion of the Supreme Court, to determine whether a digital asset or digital asset project is an “investment contract” or “security” under federal law. This test has four prongs:

1. investing money,

2. in public companies,

3. with the expectation of profits, and

4. it comes only from the work of others.

All four prongs must be satisfied for the coin / token to be set as “security.” Once coins or tokens are a security, many companies move on to such registration exemptions Rule D by completing Form D or Regulation S (where coins or tokens are offered and sold outside the United States). If one or more prongs are not satisfied, the coin / token is not a security but is considered a “utility.” Utility tokens do not require registration because they are not a security in the first place.

2. If your project includes coins or tokens that are considered “securities,” you may have other federal registration obligations.

In addition to the stringent registration obligations that may apply to coins or tokens (digital currency), ICO projects may require additional registration, reporting, and other federal obligations. Once a coin or token is considered a “security,” the individual involved in issuing the coin must evaluate whether his or her service to the public requires registration as a broker-dealer or investment advisor. This will depend on a variety of considerations such as whether an individual facilitates coin / token trading or advises investment at a cost, but as a critical consideration each individual or company launching an ICO should be carefully evaluated. Finally, some companies use online platforms to launch and issue ICOs. In such cases, the platform may need to be registered as an exchange.

3. ICOs represent an area of ​​increased federal regulatory interest and are under scrutiny due to their novel technology and potential for fraud.

The SEC’s Enforcement Division continues to aggressively investigate blockchain companies involved in ICOs for allegedly engaging in fraudulent behavior, market manipulation, and other misconduct under federal securities laws. The most common topics investigated include those on antifraud provisions or on the offering and sale of unlisted securities.

Additional issues include acting as an unregistered investment advisor, failing to obtain a federal money transfer license or failing to register an ICO platform as an exchange. SEC Chairman Gary Gensler in August 2021 compared cryptocurrencies to the “Wild West” which required an enhanced investigative approach and reinvigorated by the Commission. As a result, the SEC is using more oversight of ICOs.

4. You may need an experienced ICO attorney to help you create an ICO structure in accordance with the law and resolve other more complex issues prior to launch.

ICO is a complicated project. They require significant time, money, and labor before launch, during launch, and after the token or coin is released. Registration obligations – from coins / tokens and individuals participating on the platform – require a thorough examination. In addition, designing and finalizing legal services agreements and various expansion plans can change all the equations of “registration required” and “registration not required.” Lawyers can help blockchain companies with ICOs in the following ways, such as:

• Structure and restructure your supply to your business needs;

• Conduct a comprehensive review of laws, regulations and compliance;

• Determine whether a coin or token is a security token or a utility token;

• Advice on compliance, including AML/KYC obligations under the BSA;

• Create complex legal services agreements, PPMs, investment contracts, stock certificates and subscription agreements;

• Defense work includes defending federal investigations; and

• Assist in tax preparation regarding ICO.

If you think that your job may include one or more of these services, then it’s time to contact an experienced ICO attorney for legal guidance.

5. ICOs carry a very high liability risk due to the nature of ICOs and other federal provisions that may exist.

ICOs are offered to the public to fund new business operations. Whether coins or tokens are issued for “utility” or “investment” purposes, the technology is still new and presents many risks. Blockchain is a publicly distributed ledger that records all crypto transactions in a transparent, secure, and irrevocable manner. That said, because so many crypto transactions are virtually untraceable, the potential for fraud, money laundering, market manipulation, and other crimes is still high. As a result, many federal agencies such as the SEC — or the FBI / DOJ where criminal acts are located — have drawn attention to companies that issue ICOs.

Furthermore, federal rules such as Bank Secrecy Law and UU PATRIOT imposes various obligations on a particular company to maintain reports and records for customer transactions as well as improved requirements such as compliance programs, training requirements, and annual reviews or audits. Some crypto companies also have registration and licensing requirements such as for MSBs in FinCEN to participate in money transfer services.

“Certain ICOs include coins or tokens that would meet the SEC’s definition of“ security. In such cases, the company will be required to register the coins or tokens with the SEC or qualify for exemption. Failure to do so could result in civil and criminal penalties, injunctions, disgorgement orders, and reputational damage. To determine whether you have registration obligations under federal securities laws or other federal provisions, you should directly contact an attorney experienced at ICO. – Dr. Nick Oberheiden, Founding Attorney of Oberheiden PC

Conclusion

Initial Coin Offerings (ICOs) offer great potential for small businesses and startups to raise capital quickly and with few entry barriers. That said, the ICO is indeed a risky endeavor because of the novel technology behind the operation — blockchain technology — and the lack of consistent and comprehensive federal regulation in the crypto/blockchain industry. This increases the risk of fraud and manipulation. Before launching an ICO, consider the five points in this article and seek the services of an experienced ICO attorney to advise you on federal compliance obligations. Lawyers ’knowledge of ICOs will also be an important factor in launching an ICO.