We are starting a new mini series on WalletInvestor Magazine with the aim of sharing some information and knowledge regarding ICOs, their history, regulatory status and the risks involved. This is the third part of this series. In the first part we explored questions like “How do ICOs work?”, “What are tokens?” and in the second part we discussed the difference between IPOs and ICOs and looked at questions like “Will ICOs replace IPOs?”. Now we are aiming to discuss the legality status of ICOs and the for whitelists.

Are ICOs legal?

The legal status of ICOs has always been a difficult thing to determine. Firstly the main issue here is that it really depends on your local laws and regulations and there is no universal guideline that you can follow. In case you are intending to participate or issue an ICO the best thing you can due is to talk to a local lawyer that focuses on finances and investment vehicles.

Currently most ICOs don’t allow the participation of US investors even though there is no clear answer whether your chosen ICO is considered as a security or not. The SEC is currently chasing down several companies that have conducted illegal ICOs and even launched a website dedicated to inform potential investors on potential illegal securities offered via these new crowdfunding methods. This website is dubbed HoweyCoins and tries to imitate the illegal investment vehicles. A recently conducted ICO labeled DaoStack has even changed their plans of offering their bounties in their own token and instead went with sending the participants the ETH equivalent claiming that their lawyer advised them resulting from the lack of KYC requirements during the bounty sign-up process.

China has previously banned ICOs even though blockchain business was booming in their country previously. Just recently they went as far as banning all foreign crypto exchanges and all ICO websites with the help of the great firewall. The underlying reason could easily be the fact that people used Digital Assets to move their money out of the country. A similar thing happened in Iran where investors were buying cryptocurrencies in the 2-3 billion USD range before the Central Bank of Iran went forward and banned all cryptocurrencies.

South Korea has been known as a very progressive country technology-wise, but still they banned ICOs back in 2017. Now they seem to reconsider the decision according to certain sources. This seems like a good idea considering some ICOs just went around the current regulations, a good example is ICON.

There are some positive examples though as countries like Switzerland and Malta have been known to advocate blockchain related technology and have been very welcoming towards businesses. Binance and BigONE just recently announced that they are moving to Malta and the former ICO project Tron has been also playing with the idea.

The takeaway is that you need to be clear on your local regulations as there is no definite global answer on the issue. Even if some ICOs state that they only restrict US investors you might have a problem in the future in case you had to whitelist your documents.

There is also a good write-up here by one of the projects that crowdfunded via an ICO that discusses regulations.

How do ICO whitelists work?

Whitelists are nowadays an integral part of most ICOs. This is a process that helps the projects clear their crowdfunding with local regulations and also helps to avoid certain problems in the future. The US government for example is very strict with businesses who let their citizens participate in these ICOs and this helps to avoid the conflicts.

A recent very good example on why an ICO should avoid serving US customers is ShipChain, which has been hit with a cease and desist by the State of S. Carolina.

Whitelists registrations are usually opened up a few weeks before the actual crowdfunding starts and includes a KYC process (Know Your Customer) where documents are handed in, which are later validated by the team or a third party. The data is usually handled according to the local privacy laws.

In case the investor is accepted via the whitelist, he/she can participate in the ICO.