ICOs have proved to be massively successful, regardless if the ICO turned out to be a scam or not. While it’s hard to say exactly how much “fake” ICOs have raked up in proceeds, according to one study, 271 fake ICOs have cost investors a whopping $1 billion.

However, legitimate ICOs that have done well are raking up even more, and the total sales amount is impressive: $4–6 billion just last year. Telegram is one extraordinary case, having raised $850 million alone.

While there is a growing trend for existing companies to tokenize their business by “decentralizing” themselves through blockchain technology, these reverse ICO-based tokens are a bit different from traditional ICO tokens.

Token Legalities

Until last week, the legal status of tokens was a little murky. However, the U.S. SEC (Securities and Exchange Commission) director has finally shed some light of what whether or not the commission will classify Bitcoin or Ethereum as securities. The verdict? Cryptocurrencies (e.g Bitcoin, Ethereum) are not securities while digital tokens (generated by dApps) are.

Because utility tokens represent “future access” to a company’s product or service, theoretically utility tokens should be exempt from federal and state laws governing securities because they are not designed as investments. However, according to Hacker Noon, nearly every ICO has been operating as an unregistered securities offering while “posing under the guise of utility tokens.”

The Director of the U.S. SEC added labelling an actual investment opportunity as a “token” or “coin” offering does not mean it’s safe from actually being a security.

Token Sales

The real token sale will start when the platform or ecosystem that ICOs are developing is completed. In this scenario, the tokens now have “utility.” Their value correlates with its perceived utility with value generated by the prospect of future revenue.

Some coins also gain utility with its usage within a platform or ecosystem and the more people compete for it, the higher its value. However, it begs to differ this question…until when are tokens no longer considered to be securities? What would be considered “sufficient” utility?

Even the director of the U.S. SEC mentioned that a cryptocurrency network’s token is not a security when it has been “sufficiently” decentralized and when investors no longer have “expectation of managerial stewardship from a third party.”

It is hard to say with traditional ICOs. Because they exist outside of an actual regulatory framework, they don’t have a track record — only a whitepaper to back up the entire project. This means investors have to rely on the project’s future projections since they don’t have any past history to base off their expectations.

Taking both legalties and token sales into consideration, it makes sense that reverse ICO tokens should be regarded a bit differently from the traditional ICO tokens. With reverse ICOs, the process of these tokens gaining “utility” is much more feasible precisely because they have an established track record and perhaps a working product or service already. As a result, traditional ICOs might find it difficult to keep up with the current regulations.

For more about reverse ICOs, check out our blog post discussing additional differences.