ICO Compliance: The key considerations

What you need to know about ICOs

The approach to ICO compliance varies across different regions, however many of the same principles will apply across different jurisdictions.

The United States Securities and Exchange Commission (SEC) says there are several important points to know when it comes to ICO compliance. They are:

• • ICOs can be securities offerings
    ICOs, based on specific facts, may be securities offerings, and fall under the SEC’s jurisdiction of enforcing federal securities laws. The SEC will apply what’s known as the ‘Howey Test’ to every ICO to determine whether the coins are being offered as a security asset or something else. If an ICO fails to meet the standards required by the Howey Test then it will be classified as a stock offering and must adhere to the laws enforced by the Federal Trade Commission (FTC).
  • They may need to be registered
    ICOs that are securities most likely need to be registered with the SEC or fall under an exemption to registration.
  • Tokens sold in ICOs can be called many things
    ICOs, or more specifically tokens, can be called a variety of names, but merely calling a token a “utility” token or structuring it to provide some utility does not prevent the token from being a security.
  • Use caution before promoting offers and selling coins
    Market participants should use caution when promoting or touting the offer and sale of coins without first determining whether the securities laws apply to those actions. Similarly, those who operate systems and platforms that effect or facilitate transactions in these products should be aware that they may be operating unregistered exchanges or broker-dealers that are in violation of the Securities Exchange Act of 1934.
  • The SEC protects investors, and expects businesses to do the same
    Gatekeepers and others, including securities lawyers, accountants and consultants, should be guided by the principal motivation for the SEC’s registration, offering process and disclosure requirements: Investor protection and, in particular, the protection of Main Street investors.

Case study

The SEC is still investigating a number of companies over questionable ICOs in 2017 and 2018.

In September 2022, it issued a cease-and-desist order against ‘Sparkster’ and its CEO, Sajjad Daya, for what it said was the “unregistered offer and sale of crypto asset securities” in 2018.

According to the SEC, Sparkster and Daya agreed to settle and collectively paid more than $35 million into a fund for harmed investors.

Cryptocurrency influencer Ian Balina was also charged for failing to disclose compensation he received from Sparkster for publicly promoting its tokens and failing to file a registration statement with the SEC for Sparkster tokens he resold.

Others charged over misleading ICOs include global celebrity Kim Kardashian, who was charged for promoting a crypto asset on social media without disclosing the payment she received for doing so.

ICO laws around the world

It’s important to understand that regulations differ greatly from country to country.

For example, the Council of the European Union recently completed an exhaustive digital finance process, bringing crypto assets, crypto assets issuers and crypto asset service providers under a regulatory framework for the first time. 

A provisional agreement was reached between the Council and the European Parliament on the markets in crypto assets (MiCA) proposal at the end of June 2022.

Singapore was one of the first countries to create a friendly environment for tech companies who wanted to issue ICOs, while China banned cryptocurrency trading completely in 2021 and has even banned banks from doing business with any company that conducted an ICO in the past.

Launch or manage an ICO without breaking the law

Blockchain and cryptocurrencies are still a relatively new phenomenon, which means regulators are scrambling to keep up.

The world of ICOs can be particularly murky and remaining compliant is crucial.

This is also challenging for legal and accounting teams, who must also stay ahead of the curve to appropriately advise their clients.

If you are considering an ICO, or dealing with the ramifications of an ICO, rewired.one can help you and your professional teams understand and navigate the regulatory environment in your country and provide advice, strategies and support tailored to your needs.

Request to book a free discovery session below.

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