Our ICO and Securities Token Offering Legal Services Include:
- Analysis for potential federal and state law regulatory compliance for your token offering
- SEC compliant securities token offerings (STOs) under optimal offering structures and registration exemptions including Regulation CF; Regulation D, Rule 506(c); Regulation S; and Regulation A (all discussed below)
- Determination and analysis of the characterization of your token as either a utility token or a security token (e.g. under the Howey Test, Family Resemblance Test, Risk Capital Test, and relevant case law)
- Review and advise on your business plan, white paper, website, press releases, marketing, and advertising materials
- Drafting of your token Offering Memorandum (Regulation D), Form C (Regulation CF), or Form 1-A (Regulation A)
- Analysis of possible application of other current legislation applicable to the token and/or products (such as data protection, GDPR, consumer protection, FIA, e-money license)
- Legal opinion considerations
- Know Your Customer (KYC) and Anti-Money Laundering (AML) legal advice and solutions
- Post-token offering regulatory compliance
- Token offering broker-dealer and sales agent regulations
- Token resale and secondary market (exchange) trading considerations
- Legally compliant Bounty Programs and Air Drop campaigns
- Assisting with seed capital arrangements, third-party fundraising agreements, crowdfunding, and other capital raise structuring and compliance
- Introductions to complimentary service providers including token network architects, smart contract developers and ICO specialist investment bankers and crowdfunding platforms
- Providing updates regarding the latest regulatory developments, including relevant releases by the Securities and Exchange Commission (SEC) and the Commodity Futures and Trading Commission (CFTC) regarding their respective authority to regulate existing cryptocurrencies, ICOs and securities token offerings (STOs), and/or cryptocurrency derivatives
We Can Help You Launch an SEC Compliant Token Offering
There are more ways than one to launch an SEC Compliant ICO, or Securities Token Offering (STO), in the U.S. In April 2012, the JOBS Act was written into law to enable ordinary investors, the “crowd,” to invest in private placements of securities previously open only to high net worth individuals, or “accredited investors” (as that term is defined by the SEC). The JOBS Act indirectly created a new framework within which there are multiple ways you can conduct an ICO, or STO, exempt from the registration requirements of the federal and state securities laws. Under the JOBS Act, compliant token offerings can be carried out within the following SEC regulations – Regulation CF, Regulation D, Regulation S, and Regulation A. Our business lawyers can advise you on how to structure your token offering to fit within one or more of these regulatory exemptions.
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Under Regulation CF, you can raise up to $1,070,000 in any period of 12 consecutive months by selling your tokens, or securities convertible into tokens, to accredited and non-accredited investors alike. Your offering must be conducted on an SEC registered, equity crowdfunding platform, or portal. The securities that you issue will be “restricted securities” that, subject to certain exceptions, must be held by the buyers for a period of 12 months. There are limitations on how much non-accredited investors can invest. Also, your company, as issuer of the tokens being offered, must be a company organized in the United States, although the U.S. does not need to be your principal place of business. The SEC mandated disclosure requirements for a Regulation CF offering are not overly burdensome, and a Regulation CF crowdfunded offering is a relatively inexpensive way to raise capital. A Regulation CF offering is exempt from the securities registration requirements under state law.
Regulation D, Rule 506
Rule 506 (c) under Regulation D lets you raise an unlimited amount of money. You may broadly solicit and generally advertise your Red D, Rule 506(c) offering to the general public, so long as your sales are made only to accredited investors. We note that in 2017, Filecoin raised more than $200 million in a Regulation D, Rule 506(c) token offering.
We can help you structure your Regulation D, Rule 506(c) offering and we can help you draft your offering documents, investment agreements, and advertising materials as well as comply with all post-sale federal and state filing requirements. Although no specific disclosure requirements apply to Regulation D offerings, as a practical matter, disclosure requirements for a Regulation D, Rule 506(c) offering (i.e., the disclosure contained in a typical private placement memorandum) are more burdensome than for a Regulation CF offering, and you must take extra steps to verify accredited investor status. On the plus side, there are no caps on the amount of money you can raise, and you can advertise your token offering widely, to help build your community. A Regulation D, Rule 506(c) offering tends to be more expensive than a Regulation CF offering, but less expensive than a Regulation A offering (discussed below). The sale of securities under Regulation D involves “restricted” securities (except for in certain limited circumstances) and you and your investors must be comfortable with the required 12-month holding period.
Regulation A is a JOBS Act enhanced exemption from the registration requirements of the various state and federal securities laws that, under certain conditions, will allow you to sell up to $50 million in tokens or token related investments in any period of 12 consecutive months. A Regulation A offering requires the filing of an offering statement on Form 1-A with the SEC, which, subject to review and revision pursuant to SEC comment, is “qualified” by the SEC. Regulation A allows you to offer and sell your company’s securities tokens to the general public, subject to certain investment limits for non-accredited investors. Under Regulation A, all tokens or other securities that are sold are fully and freely tradable, with no resale restrictions, except for those you may want to impose under your token offering framework. Disclosure requirements for a Regulation A offering are more rigorous than for a Regulation D or Regulation CF offering, and typically more expensive as well. As a plus, Regulation A lets you file your Form 1-A with the SEC for confidential review on a “quiet” basis allowing you to “test the waters” and build a following prior to publicly filing your offering statement to obtain SEC “qualification.” To make use of Regulation A, however, you must be a U.S. or Canadian organized company with your base of operations in the U.S. or Canada. With our broad understanding of the Regulation A environment, we can help you plan, structure, file and qualify your Regulation A token offering while limiting your costs and maximizing your chances for a successful offering.
Offers and sales of securities tokens under Regulation S must be conducted outside the U.S. and only to “non-U.S. persons.” Tokens or investment contracts such as SAFTs sold in a Regulation S offering will be restricted securities and holding periods will apply. Because of the restrictions against sales in the U.S. or to U.S. persons, compliance structures need to be rigorously applied. For example, if you want to take advantage of this exemption from the U.S. you will need to set up a geofence to block I.P. addresses in the U.S from your Regulation S offering website landing page.
You may want to consider conducting a Regulation CF crowd funded offering concurrently with a Regulation D, Rule 506(c) private placement offering, or a Regulation D, Rule 506 offering with a (more complicated) Regulation S offering. This, in the first instance, will let you sell to non-accredited investors as well as accredited investors, thus enabling you to expand your community of token holders to the broader public, and with the addition of a Regulation S component, you can take advantage of off-shore, non-U.S. investors. We can counsel you on the pros and cons of such a combined offering with optimally structure such an offering to be regulatory compliant.
SAFT (Simple Agreement for Future Tokens) or Securities Token Purchase Agreement
A SAFT, or Simple Agreement for Future Tokens, similar to a SAFE (Simple Agreement for Future Equity), is an investment contract that converts at a future date into a token. The SAFT can be used during the ICO pre-sale phase, when your network or token platform may not be up and running and you may not be ready to set a value on your to-be-issued, future tokens. The SAFT cannot, however, be used as a tool to circumvent the federal securities laws – the token that you issue upon conversion of the SAFT may very well be a securities token governed by all applicable securities laws and you will need to plan for the issuance of that securities token accordingly.
We can counsel you on whether you should issue a SAFT or bypass the SAFT and directly issue a securities token, and we can help you draft your SAFT of securities token purchase agreement, depending on your needs and circumstances.
Bounty Programs, Airdrops, and other Promotional Activities – We Can Counsel You on Legal Compliance
Celebrity-endorsed ICOs such as those by Paris Hilton and Evander Holyfield have raised red flags with the SEC because offering incentivized rewards to help promote ICOs may be in violation of the anti-touting and broker/dealer provisions of the federal securities laws. If you pay people to endorse or otherwise promote your token offering, whether in cash or in tokens, and the tokens you are offering to the public are deemed to be securities, all compensation paid to such persons must be fully disclosed and their public statements must not be misleading in any way. If you pay such persons based on the amount of tokens they help sell, these persons could be deemed to be securities brokers or dealers and must be registered as such. Failure to be registered as a broker/dealer, if required, would be a violation of federal and state securities laws and, if not careful, you could be deemed to be aiding and abetting any such violations.
Bounty Programs, in which people or companies are awarded free tokens for endorsing ICOs or for otherwise performing various tasks necessary to the successful completion of an ICO, may involve the unregistered sales of equity securities. Although bounty programs are a great way to get your community involved in your token offering, or to get needed activities such as white paper translations performed without spending cash or cryptocurrencies, bounty program token payments may be unregistered sales of securities in violation of applicable laws, and statements that bounty program recipients make on their social media feeds, if not properly monitored, scripted and controlled by you, may end up violating federal or state regulations.
“Air Drop” programs whereby a company’s supporters are issued free tokens may also violate federal and state securities laws. You may want to reward your community or kick start your network or platform by sending free tokens to your token users or supporters. Even though air drop token recipients will not pay you anything for these tokens, you may be deemed to have received consideration, for example, in the form of added liquidity to your token market. If your tokens are securities tokens, an air drop distribution may be an unregistered sale of securities in violation of applicable laws.
If you are interested in utilizing the services of celebrities or other promotors for your token offering, you are planning a bounty program or you want to conduct an air drop of your tokens, we can help you analyze your planned activities in a securities law framework and make sure that whatever you do is compliant with all applicable US and state securities laws and regulations.
The Uncertain Regulatory Landscape
U.S. Laws and Cryptocurrency Regulation
Cryptocurrency has commanded the attention of regulators such as the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Federal Bureau of Investigations (FBI), the U.S. Department of Justice (DOJ), the U.S. Department of the Treasury through the Financial Crimes Enforcement Network (FinCEN), and the Internal Revenue Service (IRS). Certain existing laws and regulations are currently being applied to the new ICO landscape, and this can be seen, for example, in the various pronouncements and actions being taken by the SEC to return the ICO industry to the four corners of existing securities regulation. New laws and regulations will most likely be passed in the future, to adapt to the new economic realities being created by blockchain, cryptocurrency and tokenized ecosystems, and to foster market stability, integrity and the confidence of investors, prevent fraud, tax evasion, money laundering and other potentially illicit activities, and to create an environment in which blockchain, cryptocurrencies, and token economies will be able to flourish. Several states, including Arizona, Wyoming, and Vermont, have already passed laws related to cryptocurrencies and initial coin offerings, and we expect that this trend will continue.
As you contemplate your planned token offering, there are many laws that you need to be aware of, for example, the Federal Bank Secrecy Act (BSA) and the anti-money laundering (AML) regulations, in addition to the federal and state securities laws. The legal and regulatory landscape is complicated and ever-changing. Our lawyers are familiar with existing regulations, past prosecutions by the Department of Justice, SEC Enforcement Actions, and FinCEN regulatory actions, and we continuously monitor this dynamic and evolving environment. We can help you understand your legal obligations as you move forward with your token offering, and we can advise you as to how to safely structure and conduct your offering in a legally compliant way.
Do you have questions about U.S. laws and regulations on cryptocurrency and token offerings? Contact our blockchain lawyers today at (202) 869-0888 or firstname.lastname@example.org to schedule a meeting. If you want to read more about U.S laws and regulations on cryptocurrency and token offerings, see our whitepaper or our blog.
How Our Crypto Task Force Attorneys Can Help You
If you are interested in issuing tokens to raise capital in an initial coin or securities token offering (ICO/STO) and you want to make sure that your offering is regulatory compliant, Bevilacqua PLLC can help you. There are numerous possibilities for how a coin or token offering can be structured, yet each option comes with certain risks and uncertainties, which are important to understand. We can guide you through the ICO/STO process and help you maximize your company’s potential, at all times in a regulatory compliant way.
For more information about how our Crypto Task Force attorneys can help you, please call us at (202) 869-0888 or email@example.com to schedule a meeting.