Almost all ICOs are illegal.
Firstly I would like to address the problem here, initial coin offerings are currently unclassified. There are no legal precedents that explicitly pertain to cryptocurrency crowd-sales. However, according to Chris at decentralized digital, there is a strong case to be made that cryptocurrency crowd-sales can be classified as securities. Securities as in the SEC.
The SEC defines securities as
"any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a ‘‘security’’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.”,
Well, that doesn't really give us too much information. That, my friends, is intentional. The law is intended to give regulators lots of leeway how exacatly to implement the law. Furthermore, in the case SEC v. W.J. Howey Co, the SEC essentially determined that in the instances where the instrument is novel, the SEC will interpret the implications of the asset. In other words. They will look at the ends, not the means. To elaborate further, SCOTUS defines investment contracts as something that meets the following requirements.
The investment of money (or anything of value);
In a common enterprise (Some courts require vertical³ and horizontal commonality⁴);
Where investors are led to expect profit$;
Solely (which later was held to mean predominantly⁵) from the efforts of others.
So let's look at a case study of just about every ICO:
Investment of money
Yes, almost every ICO involves an investment of money. If money isn't coming in the ICO won't be successful and there will be no point in holding it. Almost any cryptocurrency that has value and in fungible meets this requirement for being an investment contract.
Common Enterprise
From what I gather this means to ask if there is a common goal being worked towards by the investors. Some cryptocurrencies don't actually fall under this category. For example, if Dogecoin had an ICO they may not have met this requirement because they don't share a common goal and there is no active governing entity. The most likely candidate for common enterprise in Dogecoin would simply be "To the moon!"
That being said, many many other ICOs do indeed fall under this category. If Steemit did an ICO with Steem, they would have met this condition. Stakeholders of Steem vote on the issues to be addressed and vote on witnesses to carry out executive decisions. They also put trust in Steemit Inc to continue to develop the platform. All that spells out common enterprise.
Profit
Most ICOs intend to make their investors profitable. Most people who buy ICO tokens intend to cash out eventually and many ICOs tought the inherent value in the token that will soon be realized.
Do token holder rely on the effort of others to make a profit
Yes, many ICOs as previously mentioned name a governing entity that the revenue from the sale will be directed to. Often times the governing body is also in charge of establishing a value proposition and increasing the value of the token in turn.
Conclusions
I am not a lawyer, and none of the information above should be taken as legal advice. That being said, it's quite clear to me that the way most initial coin offerings are implemented in the US is illegal. It remains to be seen how one might carry out a fully legal and ethical coin offering in the United States.
Footnotes
Much of this article is adapted from this excellent piece by Chris at decentralizedlegal.com.
https://decentralizedlegal.com/securities/
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Nice meeting with you. Everything you post is very interesting, you said it wasnt heee have a great day.
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(Almost all ICOs are illegal.)
Thanks for sharing
Followed
We are in different times now. The average citizen is in violation of at least 3 Federal Statutes every day. There are 10s of thousands of pages of new laws and regulations every year, making it easier and easier for the Pleebs to self incriminate. What is blatantly obvious about the Crypto World is that it is far easier to see what s being offered by the ICO, rather than just "Believing" that SEC can somehow add integrity to the process. Let this anarchy come forth and create new solutions. A Freer market is far superior to a manipulated farce.
But in short, this was a fantastic explanation. Upvoted and HIGHLY rEsteemed!
I enjoyed reading your reply. I remember when I declared to myself that any interaction with law enforcement was perilous for the exact reason you describe. We are all in breach of some law, and should we find ourselves ill thought of by an individual, perhaps in peril of sanction. I choose now to exercise great caution to limit my exposure to that risk.
Thank you for the kind reply.
"I [TOO]choose now to exercise great caution to limit my exposure to that risk."
In Crypto we trust!
your like that civil war reenactor @bitcoinmeister sat down with and talked to explaining Bitcoin like he was in the 1700s hah
If it is illegal, where or what country will they file the legal case since cryptocurrencies are decentralized? Maybe then can just file cases on the citizens who participated but on a completely decentralized currency I wonder how can they do so?
SEC may have a legal system but not a real justice system. Anyway good article that you shared, followed you.
anything not mandated is illegal comrade.
Shirley you knew this?
the real key to "legality" (in the United States, at least) is to determine if ICOs pass the "Howey Test"...
Link: What Is the Howey Test?
You may also find these helpful as well:
Link: Appcoin Law: ICOs the Right Way
and for a really in-depth PDF overview...
Link: A Securities Law Framework for Blockchain Tokens (27 page PDF)
My lawyers would beg to differ, but you would have to pay $250 /hour to get that advice. This post is hyperbole in the worst way.
I'd love to get in touch :)
[email protected]
digital stuff, it cant be made "legal" or "illegal" or you will have to make electrons illegal lol
people are free to male up their own "token" like ethereu, its not supposd to be mony..the fact people trade it like a commodity is a Byproduct a Side effect! u cant seriously claim that an ICO is "illegal" and haha you americans all teh sae, by WHOSE law u realize europe and outh aerica and china japan all have diffeet laws some actualy have REAL law unlike phoney fake bullshit "laws" of the United States which simply favor the powerful.....these "laws" arent based on any sort of reason or logic if they do exist...because you cant actually make something like a crypto currency especiialy one YOu create yourself, "illegal" even to sell out tokens for! People can do whatever they want when it comes to the blickchain and people can SEL wtever they want! by your reasonning, selling SOFTWARE shoulld be illegal because its a "scam" to print up DVDs whenthey dont COST anything to "manufacture" its all "digital goods" no it has intrinsic value..bitcoins dont have or DONt have intrisnic value because theres no bitcoins to value, its the LEDGER that hasvalue and it DOES have value the whole ledger has the entire market cap value
Legality is irrelevant to morality. Governments invariably obstruct innovation, and their rules have no place here.
I look forward to reading more on legal challenges facing blockchain tech. on decentralizedlegal. Thank you!
That's why they use careful wording in how the ICO is marketed and most also budget for legal and lawyers. IF the token has a legit and meaningful use in software, which is the case for many of these ICOs, then you are in a gray area. However, due to the SEC and law in the US, you also see many recent ICOs are not allowing US citizens to participate, specially if the main use of the token is a security to rake transaction fees or split profits. However, many, like Factom, Decent, Waves, Lisk, Ethereum, etc. all have a need and legit use in their ecosystem, therefore, the primary purpose of purchasing the token is for use, regardless of price fluctuation.
that's actually one of the craziest parts of all this, especially for blockchain startups in the U.S. if a company raises $5 million, probably half of that is earmarked for lawyers, compliance, and "regulation". and even with all that, well, I'm sure you're aware of what happened with ripple...
Link: Ripple just got slapped with a $700K fine (2015)
I think I've seen the crowdfund percentage for legal anywhere from 10%-50%, depending on use case. I think it's wise to include a large budget for this. The more they displace or impact certain businesses and sectors they will need it. Companies who are threatened may decide to launch massive lawsuits to try to bankrupt the blockchain companies. It will be interesting to watch.
Unless it's been re-evaluated, I thought it was determined that crypto currencies were not considered money as they we not issued by a government or central bank.
https://www.theguardian.com/technology/2016/jul/26/bitcoin-not-real-money-miami-judge
Great article! However, I don't think it is for us common folk to determine whether ICOs are legal or not, that is for the legislative and/or executive branches of U.S. government to determine. You did state that ICOs are "unclassified", so you are off the hook. Furthermore, you do make a pretty good case for why they will be made illegal and I personally am surprised they are not already.
Probably, the newness of ICOs caught legal eagles with their pants down. However, the IRS is ever vigilant and is already going after Coinbase for their customer's identities and financial information.
One way that may bring down ICOs is if a politician gets stung by Bitcoin or some altcoin and decides to go on a crusade to outlaw cryptocurrencies. But, it would have to happen soon because the rising tide of crypto is getting too gigantic and complicated to do anything about it.
Thank you @picokernel for the valuable information! Have a good day! Walk with me in the steppes of Ukraine!
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@picokernel wicked post mate thx for the info
Well if the IRS started asking or taxes on crypto, thyd be ADMITTING its real money and thyd have to aceot it as legal tender as well, theyd have to let us PAY our taxes IN crypto currency! Otherwise, what ? will they make us powerdown to pay them? What exchange do i use? what if the exchange rips me off? they cant force peopel tyo sell stem for dolars just to p[ay them, also peopel will just say no thanks, i will kleep my crypto in monero or dash where enoone can track iut.
sorry i just get so mad about this stuf. Humans acting like they can have control over otyher humans money, fucking contol freaks. Abolish the current federal government all together and let the states have control OF the federal government