Though ICO fundraising rocketed past early-stage venture capital and angel investing in 2017, an essential question lingers: Is any of this legal? And as American federal agencies broke their silence, an even larger question emerged: What are crypto-tokens?
The Securities and Exchange Commission (SEC) claimed every crypto asset they had seen was a security. The U.S. Department of the Treasury Financial Crimes Enforcement Network (FinCEN) said, through indicating that ICO issuers are money transmitting businesses in a letter to Sen. Ron Wyden, crypto-tokens are money. The Internal Revenue Service (IRS) stated definitively that cryptocurrencies are to be considered property.
Securities, money and property—oh my.
This represents a material change from how token projects postured in 2016 and 2017, stating they had a clear case as a utility token and were therefore no more than a regular sale of company inventory. The unfortunate truth is that this uncertainty presents risk to all parties, not just those who operate token projects past and present.
The long-term solution is clear: The federal government must create a new asset class. Crypto assets aren’t going anywhere, and ambiguity about them hurts entrepreneurs, buyers, and federal agencies themselves.
The trouble, of course, is that the federal government doesn’t move as quickly as private markets. In the interim, token issuers are left to comply with the limited guidance they have, which essentially boils down to one thing: acknowledge that you’re selling a security.
One strategy, employed by the ongoing Intiva Token project, is to offer the token as an equity shareholder benefit. Intiva Health offers a small amount of equity to accredited U.S. investors the same way many technology startups do today, and they issue a corresponding amount of token as a shareholder benefit. This means a token buyer receives the benefit of owning equity in a career management platform for licensed medical professionals while also receiving a token to be used as a utility on the platform itself. This begs the question of what happens if someone then transfers the token—does the buyer get to keep the equity?—but it’s an interesting way to reach compliance.
Another strategy employs the Simple Agreement for Future Tokens (SAFT) framework that recently came under fire by law firms who believe it only kicks the security registration can down the road. Critics warn that dividing an investment event into multiple ones does not change the fact that they’re purchasing with an expectation of profit, and the asset is therefore a security.
To make a SAFT work, it appears token issuers should give up the fight and register as a security. Paired with registration as a Regulation A public offering, the token seller gains the benefit of (apparent) compliance, while also holding the benefits that come from a SAFT: The token issuer does not have to transfer the token until the project is ready, which could be determined by the product’s availability or when the federal government finally acts.
In light of these (and other) potential solutions, it appears we have an answer to one of our questions: It is possible to operate a compliant and legal token sale. The other question still remains: What are crypto tokens? For that, we’ll need an assist from our friends in Washington.
Note: The author is not a lawyer and the contents of this article are not to be considered formal legal advice in any way. Consult an attorney with specific questions about crypto assets and regulation.
Andrew J. Chapin is a technology entrepreneur in San Francisco and a Boston Red Sox fan.