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The SEC issued a report warning about the application of US securities laws to cryptocurrencies and to “ICOs" using blockchain based technologies. As anticipated, the SEC applied the Howey test and concluded that a blockchain token could be a security under the Securities Act, the Exchange Act and the Investment Company Act. would all apply based on the facts and circumstances.
A week earlier I made this presentation at the Deloitte BlockChain Institute on the legal issues associated with tokens and how to structure them outside of the securities regulations. The video will be available shortly.
Here is the SEC’s press release: https://www.sec.gov/news/press-release/2017-131
Founded by Dr. Manfred Krischke: raised $150m as founder & CEO of
RapidEye. Launched first commercial satellite in Europe
Unique and independent platform for distributing a broad spectrum of
GeoData and complementary services
Consolidated GeoData provider, services and multiple approaches on
one platform, enhancing efficient GeoData distribution
Closed a multimillion Round A investment on June 28, 2017 to
accelerate rapid growth, reach critical mass and broaden our services
ICO v TGE: a blockchain token is a digital token created on a blockchain as part of a
decentralized software protocol
Tokens & their characteristics: many different types, each with varying
characteristics and uses. Some function as a digital currency. Others can represent a right to
tangible assets like gold or real estate
Tokens in new protocols: referred to as App Coins or Protocol Tokens.
Are tokens legal to buy and sell: It depends how your ICO/TGE is structured
Three Independent Elements - Howey Test
An investment of money: is cryptocurrency money?
In a common enterprise:
• the profits of each investor correlate with those of the other investors
• the profits of an investor are tied to a promoter
• success of the investor depends on the promoter’s expertise
With an expectation of profits: predominantly from the efforts of others
Token is not a security Token is a security
Rights to access or license the system
Rights to sell the products & vote
Rights to program, develop or create features for the
system or to “mine” things that are embedded
Rights to charge a toll for such access or license
Ownership interest in a legal entity or equity interest
Share of profits and/or losses, or assets and/or
Status as a creditor or lender;
Claim in bankruptcy as equity interest holder or
Holder of a repayment obligation
Right to convert an instrument investment interests, or
granting the holder an option to purchase one or more
Rights to contribute labor or effort to the system and
use the system and its outputs
TGE: white paper
• Describe the protocol and the network
• Identify a clear reason for the token to exist
• Provide a detailed technical description
• Set clear expectations
• Have an independent expert review
A white paper defines the network and its use cases, the characteristics and
functionality of the token, the challenges and risks of development, and the
benefits of using the network.
TGE: commit to a roadmap
• Provide a detailed development roadmap
• Include estimates of time and cost for each stage
• Include a breakdown of estimated expenses
• Allocate funding for each stage and restrict
access to funding until milestones are hit
• Name key members of the development team
• Be transparent about remuneration
• Quantify contributions of members of the
development team and advisors
• Report back to token holders periodically
• Set aside funds for independent security audits
Gives buyers confidence that the proceeds of the sale will be properly used for the project.
Setting aside funding for each stage of the project helps establish structure and allows
buyers to assess the likelihood of success.
TGE: use logical and fair pricing
• Use a pricing mechanism which does not increase
• Set a cap for the amount to be raised
• Set a minimum amount and refund buyers if the
minimum amount is not met
• Denominate the price in one currency
(e.g. ETH or BTC)
The total proceeds from a crowdsale should not exceed the estimated costs of
Pricing mechanisms which increase over time can encourage irrational behaviour and do
not treat buyers equally. Setting the price in a single currency reduces the potential for
confusion and arbitrage.
TGE: How much should the development team get?
• Decide on the percentage of the total token
supply that represents a fair reward for the
work of the development team and advisors
• Release those tokens to the development
team incrementally over time
Concentrating too many tokens in the hands of the development team and other
contributors increases the risk of centralization of control of the network.
On the other hand, setting aside too few tokens does not align the interests of the
development team with the interests of other token holders.
Releasing tokens over time prevents large numbers of tokens from flooding the market at
TGE: do not promote as investment
• Do not promote the token as an investment
that will increase in value
• Promote the token based on its functionality
and the use case for the network
• Avoid analogies with existing investment
language and processes (e.g. ICO)
• Provide appropriate disclaimers
Marketing token as a speculative investment, or drawing comparisons to existing
investment processes, may mislead or confuse potential buyers. It may also increase
the likelihood that the token is a security.
TGE: https://cloudeotoken.github.io/ - Get Your Slack There
White Paper: coming up week July 24, 2017
For ICO/TGE legal & biz: SBorovik@CloudEO-ag.com
Tripple ‘C’ Rule: Stay cool, calm & collected