Despite increasing scrutiny, there are three possible work-arounds for ICOs to keep them from falling afoul of securities laws.
These days, it seems that regulation for ICOs and token sales is popping up everywhere. The SEC has already famously ruled on the DAO tokens, and both China and Korea have banned ICOs for the foreseeable future. Even the Swiss are starting to get cautious. It may well be that the ‘wild west’ days of the ICO are over.
However, some ICOs are seeking new ways to work around regulations in different countries, both regulations that deal with ICOs and other regulations dealing with distributed businesses. Below is a summary of three attempts to overcome regulation in a legal way, and how they might fare.
Divide and conquer
One option to dodge the regulatory climate is to divide the tokens into ‘security’ type tokens and ‘utility’ type tokens. The goal of this work-around is to allow for investment without falling afoul of the SEC.
The key distinction between the two coins is the dividend payout. In the case of DCorp, for example, the non-security tokens will hold voting rights on the platform, but the security tokens will receive dividends. This framework allows the company to still issue tokens and receive investments from US investors, while at the same time, protecting themselves from SEC regulatory oversight.
Will it work? It seems that by dividing the token, the move may well protect DCorp from SEC oversight. Dividing the tokens means that there are, in fact, two instruments of investment rather than one, and only one of the two will fall within the securities definitions stipulated by the Howey test.
Buying your freedom
Another option that some companies are considering is to simply buyout another entity with the necessary regulatory compliance. By buying the company and transferring the necessary rights or legal controls, the parent company can adopt the business model of the child corporation and dodge regulation.
One example of this work-around is Stox, a prediction marketplace where token holders can predict the outcome of any number of events by betting their STX. The company recently announced the buyout of Commologic, a non-Blockchain technology firm that has existing gambling licenses.
Stox hopes that the buyout will allow them to actively use these licenses in the UK and Malta, where they had been previously obtained. Stox recently said:
“Today Stox became the first regulated ICO prediction platform when it announced its first acquisition of a company with a gambling license, CommoLogic… Through the acquisition, Stox will acquire three gambling licenses from CommoLogic: A software license in the UK., an operating license also in the UK .and a Class 4 (B2B) license in Malta.”
Will it work? It seems that it well work, since the Stox distributed platform is close enough to the CommoLogic platform that it can potentially continue on within the same framework and under the same license regimes.
SAFT
Another recent work-around is based on what is called the SAFT agreement. SAFT stands for Simple Agreement for Future Tokens, which essentially limits participants in ICOs to ‘accredited’ or ‘sophisticated’ investors, defined as those with an income of at least $200,000 or net assets above $1 mln.
These investors are, by and large, considered to be above the need for regulation because of their level of financial sophistication. In other words, they should know enough to not invest in junk. The agreement is modeled after SAFE (Simple Agreement for Future Equity) which limits participants in investments to those who are sophisticated and promises them future equity in companies. Suleyman Duyar of SaftLaunch said:
“Investors in Blockchain protocol tokens have high demand for a regulated method of participating in token sales. The SAFT provides a a framework which offers answers to many questions surrounding token sales or ICOs. Issuers can use platforms like ours to communicate with our user base and onboard new accredited investors.”
Will it work? The SAFT agreement is considered to be the best overall work-around by some, since it already has a counterpart in the VC world with SAFE, and would likely produce the best and safest results for ICOs within the US regulatory climate. Investors would be accredited by an outside company, which increases the regulatory comfort for the SEC and protects small-scale investors from larger fraudulent schemes.
While regulations continue to abound, these sorts of work-around plans will continue to flourish as well.
