The growing crypto market is seeing more and more offerings of tokens, often called Initial Token Offerings (ITO), Initial Coin Offerings (ICO) or alike. Many consider this emerging technology unregulated. However, be advised that any offerings made by the U.S. companies or by foreign companies but to the U.S. residents must comply with the U.S. securities registration requirements or be exempt from it, in which case they would be subject to other relevant U.S. laws. Here are the mistakes that must be avoided when deciding about purchasing tokens:
1. Looking only at the wording of the offering.
From the legal standpoint, there is no difference if something is called and an IPO, ICO, ITO or anything alike as long as the underlying activities are similar. By changing the name of the offering, the company will not avoid the requirement to comply with the relevant law.
2. Thinking that crypto assets are unregulated.
Tokens can represent a number of things; therefore, we must apply the existing law based on their nature. If a token constitutes a security, the relevant securities law will apply. It means that any offering of security tokens has to be registered with the Securities and Exchange Commission (SEC) or be exempt from such registration. If token is not a security, it must comply with the law regulating sale and use of such products and services.
3. Hoping for the token’s increase of value.
Only securities tokens, which sale is registered with the SEC, could be marketed for their profitability and increase of future value. However, a resale of such tokens could only be possible though a registered with the SEC market place, which does not exist now and is hardly foreseeable in the near future. Only product (utility) tokens can be resold on crypto exchanges; however, they are sold to be used and not to expect a profit. If you are interested in receiving a profit, make sure you are buying tokens, which sale is registered with the SEC, and do not expect it to be legally traded on secondary market anytime soon.
4. Not understanding a technology.
Blockchain is an emerging technology, which has no long-term history or proven record of success for any company. It greatly increases a risk of buying a worthless asset. The company may not be able to perform as it is promising during token sale due to many future difficulties, including failure of technology or regulatory changes.
5. Relying on advisers.
Although it is a good fact that a startup has reputable advisers, most of the times, the advisers are not part of the operation team and are not involved in the company’s business. They simply provide an advice; for instance, technological, legal, financial, marketing, etc. However, it doesn’t mean that the company will follow the advice or keep working with the adviser after the sale of tokens.
6. Relying on escrow.
The same principle applies to escrow, which is an independent third party contracted only to ensure that the company will receive sale proceeds only after the purchasers will receive their tokens. But it cannot guaranty any performance of the company or usefulness of the tokens, because, by law, the escrow cannot be affiliated with the company or be involved in its operations.
7. Relying on celebrities’ support.
Just like with any other product, many celebrities are being paid for their advertising work, including promoting, supporting, endorsing a product or otherwise using their name and likeness in connection with the product. In many cases, celebrities never use the product themselves or understand how it works. Presence of the famous people in the ICO marketing campaign does not guaranty that everything they say is true about the tokens.
When deciding whether to buy tokens or not, please do your own due diligence and learn about the underlying technology, company and its team. If you are uncertain or see something that raises a red flag, do not buy tokens even if you see a great hype about a particular ICO. Always make sure you understand everything, including your risks, and make an independent judgement.
Written by Katrina Arden
Attorney and founder of Blockchain Law Group