How do you play by the rules if no one knows what the rules are?

The SEC has not provided clear guidance, but recent public comments reflect their temperament towards ICOs. More specifically, SEC Chairman Jay Clayton asserted that the “structure of initial coin offerings” carry “key hallmarks of a security and a securities offering.” With dozens of ICOs flooding the market weekly, the SEC is taking an active interest in ICOs including launching a fake ICO website to educate investors. US-based companies who want to run an ICO domestically face a number of challenges to be compliant with regulations.

What does this mean for investors?

All investors’ identities must be verified through a KYC/AML process as outlined by the USA PATRIOT Act. Investors in the US must also be accredited to participate under Regulation D. In other words, if you don’t have a net worth of $1 million or make $200,000 a year, you probably aren’t accredited. Platforms like CoinList and CoinCart offer a way for ICOs to streamline KYC/AML and verification of accreditation processes.

Accredited US investor’s tokens must follow a 12 month holding period (lockup) under Securities Act Rule 144. ICOs can codify this lockup in their smart contracts by using the Token Vesting contract put out by OpenZeppelin.

What about unaccredited investors in the US?

To allow for unaccredited investors in the US to participate, ICOs can explore Regulation CF, the crowdfunding exemption. Under this exemption, an ICO is allowed to raise up $1,070,000 from unaccredited investors. Republic Crypto is a registered broker/dealer and platform that can help facilitate this portion of the fundraise.

What about airdrops and bounties?

Airdrops and bounties fall into a gray area, and ICOs should take necessary precautions before considering these types of programs. Previous SEC enforcement on “free stock” has set a precedent that giveaways (airdrops and bounties) can be considered an unregistered securities offering. This is not to say giveaways are completely against regulation because CoinList is working closely with the SEC on a compliant way to award and collect tokens via airdrops.

But SEC Chairman John Clayton said… “no initial coin offerings have been registered with the SEC”

There is a big difference between being registered and following a compliant security offering. An ICO can have an unregistered offering under Regulation D. This is also known as an exemption from registration with the SEC as a private placement. It’s common practice that “private and public companies engage in private placements to raise funds from investors.”