Three key legal points about ICO law

Planning to run an ICO? First you need to make sure your token is compliant with SEC's recommendations. Lindsay Lin from Stellar with an exclusive insight.

Three key legal points about ICO law

United States of America, as the leader and rule maker in the global financial industry, is working on figuring out the legal structure of ICOs, in an attempt to keep the current status quo and to protect investors from charlatans. Lindsay Lin of shares her take on what's a legal ICO.

1: My token is a “utility token”. Therefore, it is not a security.

A utility token is a token that can be used to access a product or service. Under this definition a cryptocurrency token is a utility token if it was created with the sole purpose of being exchanged for something such as premium services and was never intended to have a price denominated in USD.

However, the SEC has still not taken its stance on what the formal definition of a utility token is. Most likely at some point in time major tokens above some market cap threshold will be audited and the decision whether a token is a "utility" or a "security" will be made on a case-by-case basis.

2: My token didn’t meet the definition of a security under the Howey test. Therefore, it can’t be a security!

The threshold question is whether a particular token would be considered a security under the 1933 Act and the 1934 Act. If the answer is yes, the token may be subject to various SEC registration, exemption, sale, transference, and reporting requirements.

In SEC v. W. J. Howey Co. (1946), the U.S. Supreme Court provided a four-part test for whether an arrangement constitutes an “investment contract”. The test checks whether there is (1) an investment of money (2) in a common enterprise (3) with an expectation of profits (4) which are derived solely from the efforts of the promoters or third parties.

The case for unregulated utility tokens stem from number (4). In case of a utility token the price for it is being determined by assessing the value that you get from services purchased using the token, and not from third party marketing activity. Coinbase, Coin Center, Union Square Ventures, and Consensys have also built-out a thoughtful securities law framework to test whether a token may be considered a security.

However, it's important to know that the US judge may choose a different test and come up with a different verdict on a case by case basis.

3: I’ve been assured by the best law firms that my token will not be considered a security subject to U.S. federal and state securities laws. I can now do whatever I want.

Despite more than a billion dollars have been raised in various ICOs in 2017, there is still no legal framework for launching a blockchain business safely. Everybody participating is doing it at their own risk. We are all still waiting for the lawyers to catch up with what a blockchain is, and then for the lawyers to educate the real decision makers that they no longer control the world's cash flow.

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