Body
Companies and projects have increasingly relied on the sale of digital assets, or tokens, as a means of fundraising. These tokens generally do not grant the holders an ownership interest in the issuing company or project, but may provide governance rights, access rights or other utility. This has been conducted through public sales known as initial coin offerings (ICOs), proliferation through token generation events (TGEs) or private sales, among other mechanisms. While showing characteristics of traditional methods of fundraising, there are a range of unanswered questions related to the legal classifications of such products. As ICOs and TGEs will usually be distributed online and internationally, there is usually no single legal framework applying to such transaction, and the legal framework of each market in which the tokens may be offered or sold needs to be considered.
Introduction
Attitude of the country towards ICOs/token sales
Regulators in the United States, particularly the SEC, have taken the view that most ICO token sales are offers and sales and securities that must be registered with the SEC or offered and sold pursuant to an exemption. The first major communication in this regard was in 2017 when the SEC issued an Investigative Report Concluding “DAO Tokens, a Digital Asset, Were Securities”. Under the report, the SEC utilised the Howey test to determine that the DAO tokens were investment contracts that were securities because the instrument involved an investment of money into a “common enterprise” with an expectation of profits from the efforts of others. This report was followed up by numerous enforcement actions by the SEC and state regulators, including the blocking of the Telegram token, the “gram”. Litigation is still ongoing against the XRP tokens issued by Ripple Labs.
The SEC has issued a few “no-action letters” stating that certain very simple ICO tokens with no real trading or profit potential are not securities. There also was a speech and statement on the framework for investment contract analysis pertaining to digital assets, each of which indicated that a token might not be a security if there is sufficient decentralisation. That said, the SEC has yet to deem any token other than Bitcoin and Ethereum to be sufficiently decentralised, and there has been little to no meaningful guidance on how to sell a token that is not a security. Recent statements by regulators have only led to more uncertainty and the almost complete inability to do a registered ICO.
This regulatory situation has led to most ICOs and TGEs taking place outside of the United States with Americans blocked from participating. Where tokens are sold within the United States, such sales generally are pursuant to private placement exemptions that restrict the transferability of the token through lockups and other mechanisms.
Legal affairs
Presence of any explicit regulation on ICOs and the issuance of token/coins
As mentioned above, there are no specific Untied States federal laws that relate specially to ICOs or the sale of tokens. The laws applicable to a sale of a digital asset will depend on whether the asset is classified as a security, a commodity, or something else that is unregulated.
United States regulators have thus far attempted to place ICOs and token sales into long-existing laws that were designed to be used for physical assets or traditional securities. However, the limitations of the securities laws make it nearly impossible to register a token sale. As such, there are not any currency type tokens which are trading as a security in compliance with the securities laws. See “Classification of token/coins in the jurisdiction” below for additional information on the determination of the regulatory