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Initial Coin Offerings: Currency or Security? Learn to decide


October 30, 2020 | 

JOHN K MWANIKI |  0 Comments| 



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Silicon Valley is the world's top incubation region. Most of the successful businesses in the world took off from the place. It's where they get all the funding and take off. While it has been so successful, there's only so much Silicon Valley can do.

Cryptocurrencies are now on the verge of liberating fundraising. Unlike where starters needed to pitch to physical teams, cryptos provide them with an online mode. The founder only floats the idea to potential investors. After which they proceed to create a token on the blockchain. Platforms like Ethereum support the building of the tokens.

The investors then take up stakes of the token with a promise of what to gain. The investors pay through Bitcoin or Ethereum.

That is what Initial Coin Offering (ICO) is all about.

The fundraising model has been so popular, with many companies looking to go that way. It comes with ease of access and allows for global access. Anyone can take part in an ICO irrespective of the country. All these make ICOs the future of fundraising.

While the ICOs are quite useful, they keep the usual cryptocurrency risks. There is still the possibility of scams and other concerns. These calls for regulatory measures. The investor needs peace of mind and assured returns.

The only way for regulations to work is after deciding where ICOs belong. Are they currencies or securities? Varying rules apply to different assets.

The Beginning of Differences

ICOs started operating as securities. They yet didn't undergo the similar regulations other securities do. The Securities and Exchange Commission still is all about consumer protection. It went ahead to start requiring the ICOs to become complaints. By 2017, it was almost a full struggle coming within the sector.

The SEC started demanding of the CIOs to follow registration and disclosure regulations.

Many organizations retaliated by changing the form of ICOs. It was to fall outside the scope of securities. They instead want it to operate like digital currencies. Unlike fiat, decentralized virtual currencies. They don't fall under any central authority. It means the digital coins are free from SEC.

The exchange commission still maintains that a change in form does not change the state of the asset. It keeps on the regulation enforcement path.

Almost three years later, the stalemate is still on. Both sides are looking at what works best for them. SEC has done everything possible to ensure regulations. After earlier warnings, it has resorted to courts. The cases have led to concerns about whether courts will turn to receivership

The regulator is significant in monitoring the tokens from creation to execution. It has already arrested celebrities who promoted ICOs without full disclosure on payments. Some of these advertised projects never picked. Investors end up losing money in the process.

Such reinforces the need to treat ICOs as securities. Several organizations take advantage by launching dubious coins. These end up hurting unsuspecting investors.

Understanding Securities

The Securities Act of 1993 and the Exchange Act are the securities definers. They are the clauses that gave power to SEC to run the financial sector after the Great Depression. The financial institutions and exchanges were the center of interest during the period. 

The same applies to the ICOs currently. They receive billions in USD for the projects.

SEC says the Acts affects assets offered by both traditional and independent companies. The nature of currency used also does not matter, whether USD or virtual currencies. The distribution channel can also be either certified or distributed ledger technology.

That is to say, whatever the case, ICOs are securities. 

The Parliament and the courts have also been instrumental in defining securities. Congress passed securities laws that regulate all assets in whatever form they exist. They have upheld SEC definition and, in the process, included other assets.

Securities According to the Courts 

The court's primary role is to interpret laws. After some time of conflict on the state of ICOs, it's been the court to clarify.

SEC has had several cases on the matter. Of them all, the one that stands out is the SEC vs. W.J Howey Co. This was when the courts came up with the exact features that make up security. They have since been the guiding force towards the assets. 

The features are;

  • An investment of money 

The courts argued that any sale involving tangible and definable consideration is security. It already considers cryptocurrencies as a form of money. Investors buy tokens through Bitcoin or Ethereum. That in itself is money, thus qualifies it as a security.

  • In a common enterprise 

While the supreme court didn't have clear judgment, the lower courts have since clarified. The same enterprise means the organization offered the same tokens to several people. 

The impact of the currencies must also be the same for all investors. Such that it should rise and fall the same for all the investors. All the investors must be depending on the actions of the offering organization. 

Also, any investment that is not a commercial sale falls under the joint enterprise.

  • Has expected profits

All securities come with expectations. In IPOs, the shares offer stakes in the company for investors. Investors could also sell the shares later at a profit.

The same applies to ICO. Every token comes with promised benefits. In most cases, the application of the token to the use factor. They also involve sales in case of increased value.

  • Involves the efforts of others

Unlike private investing, securities are not available to a single person. Several people take up legit security. 

The same applies to ICOs. An organization floats a token idea to several investors. It is these investors who spend money on the expected profits on tokens.

ICOs come with all these features. They, thus, meet the threshold for being securities.

Bottom Line 

The debate on whether ICOs are securities or currencies has been on for some time. It has led to several court cases with crypto organizations maintaining it's a currency. 

From all the descriptions, ICOs are securities. The SEC has the mandate to regulate them under the Securities Act. That is the only way to assure investor safety. 

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