Initial Coin Offerings (ICOs)
As investors delve into the world of cryptocurrency, they may struggle to find truly knowledgeable legal counsel. At Mangum & Associates, we’re on the forefront of U.S. securities law and we assist clients with their initial coin offerings (ICOs). To learn more about this exciting and rapidly-developing area of law, or to speak to an experienced ICO lawyer, contact us today.
What Is an Initial Coin Offering?
Cryptocurrencies or virtual currencies are a unit of account or a store of value, but they are not legal tender for a government or country (which is sometimes called fiat currency). While Bitcoin is the most recognized cryptocurrency, the virtual currency market involves a wide variety of currencies — and it’s continually growing.
An ICO is the cryptocurrency market’s version of an initial public offering (IPO). Like an IPO, initial coin offerings aim at raising funds for a new coin or service. Investors who participate in the offering may contribute fiat currency or existing cryptocurrency, and receive an ICO-specific currency token in exchange. If the new cryptocurrency performs well, these investors may significantly profit from their early investment. However, there are always risks associated with an ICO.
How to Structure an ICO
You can structure an ICO in different ways:
- Static. The issuing company offers a set number of tokens for a predetermined price, and the company has capped its crowdfunding to a specific level.
- Dynamic goal. While there is a static number of new tokens, their price is determined by demand. The more funds the company receives, the higher the price of each token.
- Dynamic supply. The price of each token stays the same, but the number of available tokens will vary, depending on the amount of crowdfunding or investment the company receives.
ICOs are not without controversy. After a boom in coin offerings in 2017, the People’s Bank of China banned them, alleging that they endangered the country’s economic and financial stability. It also announced that tokens could not be used as currency in the country’s markets or banks. In 2018, digital giants like Google, Facebook, and Twitter prohibited advertisements for ICOs.
In April 2019, the Securities and Exchange Commission (SEC) announced its much-anticipated crypto-token guidance. This is the first U.S. regulation that outlines when ICOs and other token offerings fall under the purview of federal securities regulators. Because this area of law is still developing, it’s always best to consult with an ICO lawyer before you initiate a coin offering.
Who Issues Virtual Currency?
Typically, virtual organizations issue tokens via ICOs, although any entity can make a coin offering. The SEC defines virtual organizations as an entity that executes its operations using automation or a “smart contract” on a blockchain or a distributed ledger.
While many people talk about blockchains, most do not understand how they work. At its essence, a blockchain is an encrypted, immutable ledger that is distributed across multiple servers. To access the ledger, a user must have a specific key or complete a complex calculation. Bitcoin and Ethereum are popular blockchains, although there are many available.
How Do I Sell Tokens or Virtual Currency?
There are many virtual currency exchanges, where investors can exchange their tokens and cryptocurrency for other forms of currency, including legal tender. Many of these virtual currency exchanges also offer a secondary market. However, it’s important to note that the SEC does not regulate many of these exchanges, although this may change over time.
Currently, you are probably not trading your cryptocurrency of a registered exchange, and you do not have the protections that you are normally afforded when engaging in a traditional securities transaction. For this reason, you should always proceed with caution when you sell your virtual currency.
Do I Need an ICO Lawyer?
As we mentioned above, the SEC issued its first regulations regarding ICO tokens in April 2019. This is a rapidly-developing area of securities law, and we anticipate that the SEC will continue to refine and regulate the cryptocurrency markets.
When you work alongside an ICO lawyer, your organization can craft legally compliant strategies that streamline your coin offering and help you remain in the good graces of our federal and state regulatory agencies.
At Mangum & Associates, we have experience in the following:
- Issuing white papers and legal opinions regarding cryptocurrency and U.S. securities regulation
- Securities token offerings (STOs), including risk analysis
- Structuring ICOs and other coin offerings
- Utility token offerings
- Tokenized asset offerings
- Guidance concerning the legality of marketing and sales materials, helping you avoid misleading or inaccurate communications
- Assisting clients with virtual exchange applications, purchase agreements, and other documents
- Drafting information memoranda and prospectuses for token offerings
As one of the nation’s premier securities law firms, we have a nuanced understanding of how securities laws can impact cryptocurrency offerings and transactions — and we love to share our knowledge with our clients.
Whether you’re looking for education, assistance with a coin offering, or regulatory compliance post-offering, an ICO lawyer can help you understand the current cryptocurrency regulatory environment.
Request a Consultation With an ICO Lawyer
As more and more organizations and investors enter cryptocurrency markets, the need for a skilled ICO lawyer is increasing. Our team of securities lawyers assists organizations and individuals with ICOs, transactions on virtual currency exchanges, and other complex matters involving cryptocurrency. If you would like to learn more about our services and approach to the dynamic world of cryptocurrency, contact Mangum & Associates to request a complimentary consultation.