Where Technology Meets Law
How to do ICO correctly and what mistakes to avoid
Recently, there have been many announcements made by authorities of various countries in regards to the ICO and digital tokens. Most of them warn the market participants that some of the tokens can constitute securities, a sale of which is regulated by the securities law in each country where such securities are sold.

However, many startups don’t fully understand what securities are and continue selling their tokens in violation of the securities law. For example, tokens can be considered shares or debentures, both of which are securities.

One of the most common idea for the startups when they sell tokens is to offer profit from the company’s future operations. Of course, it is very attractive for the token buyers to buy the tokens that offer a continuous stream of passive income. However, such tokens are securities and their sale has to be registered with the respective authorities unless an exemption applies.

Another common mistake that may land a company in hot water is an offer to purchase back the tokens in a future. This may also constitute an offer of securities because under these circumstances, a token can be viewed as a debenture, an instrument that evidences the debt of the company to the token holders.

Because there are many rights that tokens can represent, it is very important to check whether such rights fall under those typically granted by the securities instruments. Each country has a statutory law, which defines securities and lists their types.

Important to note, that many countries have very similar securities laws; however, the registration process and exemptions may vary significantly. That is why selling tokens that are securities through the global ICO may be very complicated for startups. It is better to limit the sale of such tokens to a specific country to comply only with one set of regulations or to avoid selling securities all together and create a utility (product) token instead.

A utility (product) token is a token that grant its owner the rights other than those attributable to securities. Such rights can be as follows: a license to use software, a membership to a club, a discount to purchase a product, etc. Utility (product) tokens don’t grant voting or profit sharing right in the startup. Sale of utility tokens is a pure sale of the startups’ product or a useful benefit not associated with securities. The sale of utility (product) tokens is governed by the consumer law, which is relatively similar in most jurisdictions and does not require any specific registrations. Therefore, startups are able to sell their utility (product) tokens worldwide.

Written by Katrina Arden
Attorney and founder of Blockchain Law Group
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