The current lack of clarity governing Initial Coin Offerings (ICOs) and cryptocurrency more broadly in the United States’ legal system has led some to consider whether including U.S. citizens in an ICO or Token Generation Event (TGE) opens a company to unnecessary liability. With ample investment opportunities outside of the States in more certain or liberal legal environments, some have taken a skeptical eye toward the U.S. investor, posing a fair question: why even take the risk?
Know Your Investor/Buyer
Regardless of a respective legal climate or set of regulations, it is imperative that companies launching an ICO do their due diligence on potential investors or buyers. Startups must invest the necessary time and money to conduct thorough Know Your Customer (KYC) and Anti-Money Laundering (AML) processes for individuals participating in a token sale in order to limit the possibility that nefarious actors become involved. Doing so will spare them potential time, money, and embarrassment in the long run.
American Buyers: Seller Beware
The opacity shrouding the issue of cryptocurrency regulation in the United States has led many startups to err on the side of caution when it comes to allowing U.S.-based buyers to participate in their ICOs. Token issuers can’t be certain whether their coin will be designated as a utility token or security token, or what that distinction will mean for them legally. The prosecution of certain startups that previously issued ICOs has only created more fear and uncertainty toward the U.S. legal system’s treatment of ICO-issuing startups.
What this means is a wait-and-see approach by many startups that would relish the opportunity to tap into the U.S. market of token buyers and investors, but simply cannot due to potential legal liability.
The Need for Regulatory Clarity
It’s rarely a popular opinion to call for more regulation, especially in freedom-minded cryptocurrency circles. That said, it’s clear that the lack of regulation with respect to ICOs is serving as a discouraging force on token sales that is far more powerful than any regulation. It is uncertainty — will new laws be implemented? what will they look like? etc. — that most drives ICOs into the arms of nations with clearer, established guidelines regarding the designation, regulation, and taxation of ICOs.
Locations such as Switzerland and the Cayman Islands, known for their ultra-private approach to financial regulation, have become popular sites for companies seeking to issue ICOs without undue risk. Those who do choose to sell their tokens to U.S. citizens are typically only doing so to accredited investors. These investors must have an annual income of $200,000 as an individual or $300,000 as a married couple for three years running, with an expectation that the same or greater income will be earned in the future. Naturally, this precludes many would-be American investors who may otherwise be inclined to take part in a token sale. But it’s not the issuers who are to be blamed for this exclusion — this is the precaution ICOs must take in order not to run afoul of laws that may be acted upon now or implemented in the future.
In order for ICO issuers to play by the rules, they have to know what the rules are. And until they do, the United States and American citizens will remain less than attractive in the eyes of startups who prefer to have their fundraising unaffected by latent litigation that may or may not be acted upon in the future.
Adrian is the CEO of a new Singapore based company BlockchainWarehouse which supports companies through their Initial Coin Offering and Token Generation Event, as well as providing blockchain development capability to clients. He is also FinTech/InsurTech Business Advisor to Axpire, a new start-up providing software to hedge funds to improve the efficiency of their middle and back-offices, underpinned by blockchain.