Challenges in selling securities tokens via ICO
The blockchain technology allowed companies to raise capital faster and less costly. However, the greatest advantage is that a company can offer a share in the company’s profit to the token holders without founders giving up the equity.
At the same time, sale of security tokens is subject to the U.S. securities law, which requires registration unless some exemptions apply. The registration process, just like in the IPO of traditional stocks, may be very complicated, lengthy and expensive. As expressly stated by the SEC, offering of the tokens that are securities has to comply with the U.S. securities law regardless of whether such securities are offered on blockchain or not.
The U.S. securities law provide some exemptions to the registration process for the companies that are willing to accept certain limitations imposed by those exemptions. For instance, some exemptions may have a limitation on the total amount of capital raised by the company, some may impose restrictions on the type of investors allowed to participate in the offering, some may require companies to register with the state authorities, etc. Issuing securities would also subject the company to certain reporting requirements imposed by the SEC.
Important to remember that each country has its own registration requirements and exemptions, which makes a global offering of tokens even more complicated. Also, in the U.S., each State has its own securities law, establishing a registration procedure for a sale of securities to that State’s residents.
But even if the company complies with all of the requirements imposed by the securities laws and issues its security tokens to the public, those tokens cannot be traded on the secondary market because, as of today, there are no licensed exchanges that can accept security tokens for trading. The available exchanges only list tokens that do not have characteristics of the securities and require a written opinion letter from the U.S.-based attorney to validate such fact.
The penalties for violation of the securities law vary among the countries; however, they are never small. In most cases, the regulating authorities seek a disgorgement along with the interest and civil penalties. In some jurisdictions, criminal punishment may also be imposed under certain circumstances.