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How to do a successful Initial Coin Offering (and not get sued) – Flag Theory

How to do a successful Initial Coin Offering (and not get sued)


( update : We ’ ve written a new article on where to set up a company and the proper corporate structure to run an initial Coin Offering, check it out here. )
To IPO – or issue an initial populace offer to the public is the time in which a private company ( with merely private shareholders, being accredited or professional investors, the founders, employees, advisors, and others with close up ties to the public can access the populace markets at big ). In the populace markets are hedge funds, and other retail investors who invest in stocks .
Hence, an IPO is a germinal consequence for a individual company where leading up to this, millions are spent in due application, document training, and legal/filing/lawyer fees. typically in the US, one would file with the SEC, and they would give permission to list on a stock exchange ( the most popular being NASDAQ and NYSE ).

however, in recent years, a newfangled method of offering value in a company has become popular among hackers, with hundreds of millions in value raised. An ICO is much times without legal paperwork, without lawyers, and without the license of any government agency ( for better or worse ) .
so in rate to examine the ICO model we look at this process vs. traditional methods of raising capital, and how to do it wrong, and ultimately tips on how to do it right .

What is an Initial Coin Offering (ICO)?

ICO or Initial Coin Offering is the unregulated means by which a start-up raises funds to start, develop or complete its cryptocurrency or its block-chain based software projects. Avoiding the difficulty and the rigorous and baffle processes to obtain funds through banks or speculation capital investors. Explaining it in a simple way, the startups release tokens on a raw cryptocurrency, that investors buy through existing digital currencies, normally Bitcoins or Ethers, or legal affectionate. so, the start-up can obtain financing for the exploitation of the project. And investors expect those tokens to increase in prize and get a high ROI .
normally, in an initial Coin Offering, the start-up offspring a document presenting the service, merchandise or solution concept, characteristics, added respect, the existing needs that will cover when finalized, the sum of money required, the amount of virtual currency that the investors will keep, the accept digital or fiduciary currencies and the duration of the ICO. If the campaign does not raise the minimal fund established, it fails and money is returned to investors .
Unlike an IPO, where shares represent a stake in the company, in an initial Coin Offering, the tokens are normally new digital currency units. These can be traded for early currencies or for the purchase and use of certain products developed by the start-up or licenses to run the software developed. In some cases, some ICOs issue their tokens on existing digital currencies, where the tokens represent voting powers in the invest project .
During an ICO, the investors buy the tokens at a previous established price. Which may vary depending on the stagecoach in which the ICO is. Where token price increases increasingly as different investment thresholds are achieved. Encouraging and rewarding early investors .
The hazard of this type of investment is considerable. There is no guarantee that the investor will get their money back, much less make a profit. Considering that in an ICO the tokens ’ rate is merely supported by the trust and religion that the visualize will be successful. failure to complete the project may mean the loss of the money invested .
furthermore, most countries lack regulation is an lend risk. Permitting victimize proliferation. project owners may disappear with the money and the funds may be unrecoverable. consequently, unplayful startups that launch their campaigns have self-imposed a code of rehearse, to be crystalline enough and provide confidence to attract investors .
On the early hand, the main drawing card of some of these investments is that the measure of the tokens, once the project is developed, will be backed by a real and useful product. This is normally a guarantee of a solid nominal price increase, and consequently a considerable ROI rate .
In 2013, Mastercoin launched the beginning Initial Coin Offering and raised more than $ 5 million in Bitcoins. Since then many campaigns have been launched. Of which some have been successful, like those of Ethereum and the most late one ( 2016 ) Wave, that raised $ 18 million and $ 16 million respectively .
Regarding Ethereum, it was, without a doubt, the most successful. Ethereum is a decentralize platform that supports the initiation of smart contracts agreements between peers, using its own cryptocurrency “ Ether ” to execute the contracts. The development of the Project was funded through an ICO during July and August 2014. The ICO managed to raise $ 18 million in Bitcoins, at $ 0.40 per Ether. The project was launched in 2015 and presently, the Ether has a rate of more than $ 25 and a entire capitalization of more than $ 2,000 million .
Long history inadequate, as an investor you have to prudently perform due application, and as a founder- you should truly make certain you don ’ deoxythymidine monophosphate run afoul of securities ( and other laws ) because uncle surface-to-air missile can and will come after you .
For all the bad, there are some companies and foundations that have done a lot of good. For case, Ethereum, Waves, others, have successfully leveraged an initial Coin Offering to create entirely new business models. ICO ’ second in themselves are not bad, just as a gun international relations and security network ’ thyroxine bad by itself ( only potentially dangerous, in the hands of wrongdoers and victims ) .

Traditional IPO Model

This procedure is called an “ ICO ” and it involves a company issuing a native nominal, in order to incentivize investors/users of the application to invest at the FRONT of a companies lifecycle
Compare these two timelines for an exemplar :
How to do a successful initial coin offering (ICO)
Friends and family and fools take the first money in a ship’s company, then business angels, traditional venture capital funds typically come in at recently seed series A through Series B or C, at which luff private equity starts putting money in, until finally, an IPO happens .

How to do an Initial Coin Offering in the wrong way

An ICO follows a identical different model and looks more like this :
How to do a successful initial coin offering (ICO)
ICO ’ second are much done without any regulative oversight and involve the direct sale of the future value of a company directly to the general populace.
Sometimes the miss of examination leads people to be regretful actors, and pump up the price, entirely to ‘ dump ’ the stock in a major betray off, or worse run an outright pyramid outline. This may lead to initial profit for the founders, but might besides lead to lawsuits or criminal penalties. See GAW miners .
According to the SEC ’ s civil complaint, Homero Joshua Garza and his companies, GAW Miners and ZenMiner, sold more than 10,000 “ investment contracts representing shares in the profits they claimed would be generated from using their purported computing exponent to ‘ mine ’ for virtual currentness. ”
Between August and December 2014, the companies sold $ 19 million worth of these contracts, dubbed “ Hashlets .
As we ’ ll experience late, How to do a successful initial coin offering (ICO) a security by any other diagnose, however smells just as angelic, to the noses of inquiring SEC enforcement officers. ICO ’ s are not limited to people peddling new old age categories, some simply flourish real standard and real promises of future profits. As you ’ ll soon see, this is a badly theme !
Or take for case this wholly different civil complaint accusing Chen of securities fraud he had initially offered investors “ shares ” in the company in April 2013 :
Investors in USFIA received units of ownership in USFIA. Chen represented that these units would be convertible to USFIA common lineage, on a 1:1 footing, when USFIA went public. Chen besides told investors that when USFIA went populace, its common stock would not be worth less than $ 20 per plowshare. USFIA identified the units as “ points ” in the investor accounts it maintained on its computer system .
In accession to receiving units for points in USFIA, investors besides typically received an amount of amber, purportedly equal to 30 percentage of their investment. USFIA did sent ( sic ) the amber to investors, but upon obtaining appraisals of the amber, investors learned that the amber was practically despicable .
The streets are littered with fail startups that went abdomen up ( or failed to even start ) :

  • KnCMiner
  • Crypt.sy
  • Mtgox
  • The ill-famed “ DAO ”

following, I will show legal precession and successful Initial Coin Offering cases ( where people didn ’ thymine get sued or go to imprison ) .

How to do a successful Initial Coin Offering (and not get sued)

At FlagTheory our deputation is to help entrepreneurs succeed when it comes to the legal, tax, and conformity domains – particularly when launching in a new market or dealing across borders. We help assemble lean teams of experts to bring achiever to your project. next, we talk about how to ( potentially ) do a successful Initial Coin Offering within the bounds of the police .
How to do a successful initial coin offering (ICO)
This picture is meant to serve as a better option for an ICO as opposed to those who are just scams. typically for a successful Initial Coin Offering ( for both the founders and token holders ), there must be a trouble where blockchain has a alone respect proposition to solve this problem. There should be a team in stead ( largely this is what you are buying at this phase ) and there should be shape done, and evidence of influence done .
An psychoanalysis of popular crypto-token issue and actionable tips for your own ICO .
This is not legal advice, this is a popularize observation and not specific advice for your site. Seek out personalized advice from an individual in your jurisdiction .
There is a antic new worldly concern of opportunity in the ‘ blockchain ’ earth, one which allows for true automation and inclusiveness in finance. however, for a worldly concern of an entrepreneur there are a act of logistic hurdles involved in launching your decentralize application .
While the world of circulate ledgers, blockchains is a newly one, there is a huge landscape of existing legal precedent that may apply to your situation, and professional advocate tailored for your specific situation is a beneficial theme .
legal hurdles to overcome ( each of these will be a part below ) :

  • incorporation
  • Terms and Conditions
  • Securities Laws
  • Commodities Laws
  • tax
  • AML/KYC
  • consumer protective covering

Incorporation

foremost and foremost it ’ s suggested that any company, operating as such – frame-up a legal entity and declare a jurisdiction, and venture for dispute resoluteness. By defining these terms from the beginning, you clear any ambiguity. This does not preclude you from laws applying when dealing with certain laws of customers or investors who reside or a citizen of certain countries. however, leaving it without a legal entity exposes you to be classified as a general partnership, with general indebtedness attached to each collaborator, jointly and respectively. This is not ideal .
Picking a friendly jurisdiction, possibly one with a regulative sandbox which allows you to operate within the bounds of the law is the theme scenario. tied more ideal would be if you could secure a ‘ non-action ’ letter from a specific governor, but these are burdensome to obtain and regulators will be loath to completely forfeit indebtedness. In order to help pick a proper jurisdiction, you might compare the laws, the details in the companies act, and the securities governor .
All this information ( and more ) is available for free at Incorporations.io .
( update : We ’ ve written a new article on where to set up a company and the proper corporate structure to run an initial Coin Offering, check it out here. )

Terms and Conditions

Laying out clear terms and conditions that define risks, uses, warranties, indebtedness and other core and fundamental legal issues is crucial to a successful Initial Coin Offering .
nothing should be left to find and one should make campaign for every contingency to be defined. Taking the DAO approach of “ law is code ! ” is a dangerous and oblivious action .
The terms and conditions should be the legal communication between your undertaking and the public, and hence the lyric used is of significant import- but all the communication must be taken into circumstance. If your terms and conditions are watertight, but the founder is tweeting “ guaranteed returns, buy your ICO today ! ” then this may be noticed by regulators .

Securities Laws

Securities laws are complex and vary from jurisdiction to jurisdiction. however, the flying compendious is that you by and large would NOT want to be regulated as a security. { unless your asset is in fact a security, and you want to be treated as such ). This would require registration in the United states with the SEC .
I have to give a hat tip to Dominic Williams who authored a fantastic article with in astuteness psychoanalysis of securities laws while this article was being written. I can summarize his suggestions down to 4 dim-witted points that seem to cover “ The Howey test ” relatively well .

  1. The first thing to examine in a transaction is the motivation behind a token. Is the buyer’s primary motivation of buying the token that of investment or anticipated future profit? This is likely to be a security.
    1. Is this buyer interested for a minor asset, consumer good, or participation which helps the seller with early cash flow difficulties, or to advance a consumer purpose – this is obviously less likely to be construed by either the consumer or courts as a ‘security’.
  2. What is the plan of distribution? Is there common trading for speculation or investment.
  3. Thirdly, look to see what the reasonable expectations of the investing public would be.
  4. Finally – is there an existing regulatory scheme where the token sale can take shelter? This may reduce the risk of the instrument. (and is part of the reason why picking a jurisdiction and regulator is very important!)

What ’ s the TL ; DR here ? You want the buyers primary motivation to be consumption. There is relevant caselaw hera : United Housing Foundation v. Forman
In this sheath, residents of a cooperative caparison project sued a property developer, for the sale of unregistered securities ( shares in the concerted ).

The Court in Forman noted that even though the instruments in interview are called stock and the parole “ stock ” is included in the definition of a security, the economic realities of the transaction are what need to be considered in light of the purposes of the securities laws. The court stated, “ In holding that the name given to an instrument is not dispositive, we do not suggest that the identify is wholly irrelevant to the decision whether it is a security. There may be occasions when the use of a traditional name such as ‘ stocks ’ or ‘ bonds ’ will lead a buyer justifiably to assume that the federal securities laws apply. This would distinctly be the case when the fundamental transaction embodies some of the meaning characteristics typically associated with the named instrument. ”
The woo reasoned that “ people who intend to acquire only a residential apartment in a state-subsidized concerted, for their personal use, are not likely to believe that, in reality, they are purchasing investment securities just because the transaction is evidenced by something called a partake of stock.. .. [ T ] he inducement…. was not to invest for profit. ”
Importantly, the court concluded that “when a purchaser is motivated by a desire to use or consume the item purchased. .. the securities laws do not apply.”

Commodities laws

In jurisdictions where the asset being traded or sold – sometimes there can be a regulator who regulates commodities individually. In the United States, this would be the CFTC .
If your coin represents an underlying asset- then that asset may be regulated. For exemplify, if your coin is representing gold – which is a commodity, then it may fall under the horizon of a commodities regulator .
Dgix DAO – Singapore incorporated company who trades gold has successfully fund-raised over 5m .

AML/KYC

One of the most difficult areas for a crowdsale owner to participate is the AML/KYC laws. If you are distributing coins to known terrorists or members who are on a watchlist ( think OFAC, etc. ) then you may be committing a crime. In the US this would fall under the jurisdiction of the Office of foreign assets and operate, under the treasury department, who administers and enforces economic and craft sanctions .
There are certain jurisdictions which make KYC/AML easier to comply with than other jurisdictions .
basically know your customer laws require that owners of a caller be identified by their government issued documents – absent of which, you may be considered to be aiding and abetting economic terrorism. If you don ’ t know their name, ( or if they are a terrorist ), then how could you be expected to perform sanctions screening ? The law has an answer to this motion, that you are inactive responsible to find out their name .
How a lot KYC should you collect ?
If your company is a regulated entity, then there are laws or regulations prescribing the measure of KYC to collect ( for example, the government issued ID + a utility poster for a natural person ). however, it is likely your entity may be considered non-regulated, in which casing collecting KYC only needs to satisfy the minimal required by that legal power. Again, this is complex as you may not be operating in any particular jurisdiction, which opens you up by and large to any legal power where they have residents who are investing or participating in your ICO .
Do you very need to collect KYC ?
As cryptotokens are a fresh invention, laws have not caught up to the pace at which engineering moves. Because of this – it ’ s a bit of a grey area whether KYC needs to be collected for an ICO or not. If you consider your ICO a security – then yes – absolutely KYC needs to be collected and besides you need to determine whether the buyer is an accredit or professional investor. however, if you consider your ICO as a token for habit in your intersection – then typically there international relations and security network ’ t a prerequisite for you to check each and every customer. This could however be disputed, as while in daily commerce not every transaction is screened against sanctions lists – businesses are not allowed ( or not legally allowed ) to do business with person who is on a sanctions number .

Money transmitter laws

Oy ! This one is one we about forgot, but it ’ s a doozy. Money sender laws in the US are regulated by FinCen and under the Bank Secrecy Act ( BSA )
The latest predominate from the globally influential US regulator is an “ administrative letter ruling ” published on the FinCEN web site, regarding “ Persons Issuing Physical or Digital assignable Certificates of ownership of cherished Metals. ”
The Company provides Internet-based brokerage house services between buyers and sellers of precious metals. The Company buys and sells valued metals on its own explanation. The Company holds precious metals in custody for buyers that purchase this overhaul, opening a digital wallet for the Customer and issuing a digital proof of detention that can be linked to the Customer ’ randomness wallet on the Bitcoin blockchain ledger. The buyers can then trade or exchange its precious metals holdings at the Company by any means it could trade or exchange bitcoin, via the rails of the blockchain daybook .
Not all digital currency companies are classified as money transmitters, those that do should ensure submission to avoid penalties and fees .
“ the facts and circumstances, issues, and analyses that appear in an administrative letter rule are of general interest to fiscal institutions then the letter rule is published on our web site, ” said FinCEN .
FinCEN recognized “ convertible virtual currentness ” as having an equivalent value to fiat currency, or acts as a alternate for decree currentness. consequently, digital currency service providers must follow the same rules that fiat currency service providers do. The regulation does not differentiate between “ real currencies ” and “ convertible virtual currencies. ”
While digital currentness transmitters are not exempt from FinCEN ’ randomness rules, users are excluded, including some miners .
“A person that creates units of this convertible virtual currency and uses it to purchase real or virtual goods and services is a user of the convertible virtual currency and not subject to regulation as a money transmitter.”
The definition is clear, companies offering brokerage services between buyers and sellers are often classified as money transmitters. however, FinCEN has some exceptions, “ When a broke or dealer in currency or other commodities accepts and transmits funds entirely for the purpose of effecting a bona fide purchase or sale of currentness or other commodities for or with a customer, such person is not engaged as a business in the transportation of funds, and is not acting as a money vector as that term is defined in our regulations ”
In such circumstances, the infection of funds is a cardinal component of the actual transaction necessity to execute the shrink for the buy or sale of the currency or the other commodity. The transmission of funds is not a separate and discrete service provided in addition to the underlie transaction. It is a “ necessary and integral depart of the transaction .
What does this base : you want to SELL a product, not facilitate money transfers.
early approaches, if liquidity in and out is something you do want to provide .
Apply for MSL in multiple states .
Starting a Bank a class A deposit license in Puerto Rico or St. Vincent is a reasonably expensive option .
Start a SVF – a store measure facility is a loanblend, normally referred to as a ‘ wallet ’, and in Singapore, the laws are quite friendly. hypertext transfer protocol : //www.mas.gov.sg/singapore-financial-centre/payment-and-settlement-systems/payment-media/stored-value-facilities.aspx

Equity crowdfunding vs. Crowdfunding laws

many jurisdictions have fairness crowdfunding laws while placid others have crowdfunding laws. The identify eminence here between equity fund and intersection crowdfunding is whether some kind of security is being offered .
With equity crowdfunding, there is typically a locking of 5 years or more before the ship’s company achieves a liquidity consequence. With an ICO, the token holders can typically liquidate their tokens within a a lot shorter time period. Niether crowdfunding or fairness crowdfunding laws as written nowadays represent fairly and accurate description & government of Token sales .
Beyond the US, other regulators are watching…
It makes good sense for you to go and have a chew the fat with a local anesthetic securities governor in your legal power. recently, they have been setting up fintech contact points, and some even have a regulative sandbox. In Canada, at least Ontario, the OSC is suggesting just that .
hypertext transfer protocol : //www.coindesk.com/ontario-securities-regulator-warning-ico-blockchain/
In statements, the Ontario Securities Commission ( OSC ) said on 8th March that the province ’ s laws may apply to ICO ’ second in some cases, advising companies that that utilize the technical school to get in reach with them .
The OSC made references to initial mint offerings and said:

“Products or other assets that are tracked and traded as part of a distributed ledger may be securities, even if they do not represent shares of a company or ownership of an entity. Businesses’ specific use of [distributed ledger technology] may trigger Ontario securities law requirements, including the need to be registered or file a prospectus.”

Currency and Legal Tender

It might make good smell to avoid calling your app token a currency .
It might be very well to your app token a currency .
It might make MORE sense to avoid doing this, as shown by the Liberty dollars history. How to do a successful initial coin offering (ICO)
Arcades in the US rally tokens in exchange for dollars. They are NOT accredited money transmitters, and however black helicopters haven ’ thymine descended to seize all of the tokens in the old ms political action committee serviceman crippled consoles .
however, on March 18, 2011, Bernard von NotHaus was pronounced guilty of “ reach coins resembling and exchangeable to the United States coin ” The FBI said :

Article I, section 8, clause 5 of the United States Constitution delegates
to Congress the power to coin money and to regulate the value thereof. It is a violation of federal law for individuals, such as von NotHaus, or organizations, such as NORFED, to create private coin or currency systems
to compete with the official coinage and currency of the United States. {FBI press release}

Liberty Dollars used gold, sil How to do a successful initial coin offering (ICO) five, platinum, or copper to denominate certain value .
however, it is not illegal to make private currencies, whether they are printed or minted ( or spawned by an ethereum virtual machine ), are ordinary statutes against fraud. SO why did these guys go to Jail ?
first, one can sanely assume he was made an case of by union agents. It ’ s not unfair to say that governments will look to ‘ nip something in the bud ’ with a visible prove of force. For shore leave Dollars, the outspoken founder von NotHaus was the collapse of an organization called the National Organization for the Repeal of the Federal Reserve and Internal Revenue Code, normally known as NORFED and besides known as Liberty Services. Liberty services created Liberty Dollars were backed by a physical commodity—a weight in precious metallic. And crucially, Liberty Dollars also differed from other alternative currencies in that they carried a suggested US dollar face value.
He faced up to fifteen years in prison, a $ 250,000 all right, $ 7 million worth of mint coins and precious metals confiscation to the government ( this was later returned ). A zone Attorney in North Carolina, Anne M. Tompkins, described the Liberty Dollar as “ a alone form of domestic terrorism ” that is trying “ to undermine the legitimate currency of this state ”. The New York Sun. March 20, 2011. The Justice Department press spill quotes her as saying : “ While these forms of anti-government activities do not involve violence, they are every bit as insidious and represent a unclutter and give danger to the economic constancy of this nation. ”
Lot of huff and puff and I ’ ll blow your house down ! In the end, on December 2, 2014, he was sentenced to 6 months house arrest, with 3 years probation. That ’ s a pretty light wish if you ask me .
In an e-mail, he stated that his probation has been terminated early and he is unblock. termination of probation was granted December 9, 2015 by U.S. District Judge Voorhees : hypertext transfer protocol : //www.libertydollarnews.org/2015dec/BVNH_pt.pdf
When asked for his opinion he said : “ This is the United States government. It ’ sulfur got all the guns, all the surveillance, all the tanks, it has nuclear weapons, and it ’ randomness worried about some ex-surfer guy making his own money ? Give me a break ! ”

Summary

There you have it folks. I ’ ll give you a break and summarize this into simple, concise actionable bullet train points that will hopefully keep you out of imprison, and allow you to ICO and profit with good intentions .
TL, DR
broadly good Approaches

  • Knowing your customer – using a company as a legal entity, not selling securities to non-professional/accredited investors
  • If you must ICO, treat your Coin holders as participants, not investors
  • Establishing a jurisdiction
  • How to do a successful initial coin offering (ICO)Establishing a legal entity (so not treated by default as a partnership with unlimited liability).

generally Bad Approaches

  • No terms and conditions
  • No incorporation
  • No legal representation
  • having ‘no’ jurisdiction or venue, allows courts to define where you operate
  • Pyramid schemes with incentivization of multiple levels
  • Calling your token “currency” or claiming to represent or replace a specific country’s legal tender

Flag Theory is here to help you launch an initial Coin Offering ( ICO ). We assemble teams to help with all of the legal, tax, conformity and bank issues you need to be mindful of for both your company and its officers .
We are experts in cryptocurrencies and understand the legal workings that underpin an ICO. We will help you to set up your company for your ICO in the most favorable jurisdiction, designing the best corporate structure and selecting the places to setup it based on the unique complexities and phone number of options available to your specific situation .
We manage the implementation of the stallion structure for you, so you have a complete turn-key solution quite than a bunch together of pieces to try and put together on your own.

Flag Theory is the one discontinue shop class to launch your Initial Coin Offering with the proper corporate, legal, tax and bank structure to remain compliant with the laws .
Click here for further details .

ICO Flowchart

Click the flow chart to enlarge

source : https://leowiki.com
Category : Economy

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