How To Make Your Crypto ICO Compliant with Security Rules Reg A+ & Reg D
- Application of the regulations to initial coin offerings.
- Reg D and Reg S.
- Do your Initial Coin Offering or ICO with the SEC rules.
Security or Utility token
- Initial point offering could be as token.
- Utility or Security token.
- Check Securities incorporate law if you going as a security.
How to do your ICO right
- Take care of the corporate niceties.
- Organize yourself as a company either a corporation or an LLC.
- Make sure that you follow the rules under whichever state you incorporated or organized.
State laws and the SEC jurisdiction
- The rights and privileges in the company to be founded with the funds of the ICO.
- Follow the law of the place, it means if you’re incorporated in Delaware you follow the laws of Delaware.
- Securities law principles in terms of the jurisdictional issue.
- If you’re using any advanced means of communication the SEC probably has jurisdiction over you.
- With respect to state jurisdiction a lot of states will have jurisdiction over your offering if you located in that state and you’re even if you’re not offering to people in that state.
- The Securities Act regulates offers and sales of securities.
- About sales, the securities law treats things given away as a sale of securities, it means that there is no thing as free and that everything is an offer.
Types of offerings
- The Regulation D have various types of offerings.
- The Regulation D have to sell to accredited investors.
- If we’d be relying in the section 506 C of the Reg D, it would mean that you can advertise, you can even publicize your offering but you should verify if your investors are accredited.
- Other option is the Regulation S that is being used by a few ICO but this one has some issues.
- The Securities offerings don’t need to be registered if they are outside the United States.
- The advantage of the Reg A is that you can sell anybody even if they aren’t accredited investor.
- You can’t spend more than 10% of your net worth.
- If you’re selling a small amount that is limited to a million dollars you need the SEC approving.
Pre-sales are still sales
- The pre-sales are sales.
- If you’ re selling securities you’ve got to have an exemption.
- The bounty programs or some of tokens are sale of securities therefore you need an exemption.
State registration requirements
- Reg A and Reg D are those preempt state regulation.
- In the regulation apps if you’re selling something outside the United States you need check the requirements of the state in which you’re operating.
- It’s important to bear the anti-fraud rules because if you say something that isn’t true you can get sued for it, even if you have complied whit the exemption.
- The section 12 G for the securities exchange act, which says that if you have got more than 500 shareholders then they have to register in the SEC and become a fully reporting company.
Simple Agreement of Future Tokens (SAFT)
- A lot of people want the SEC rapidly amend the regulations for the ICO.
- SAFT is a convertible note on the purchase of a future token.
- The token that doesn’t exist is a solution to in itself because it gets money through SAFT which is a more conventional for an equity purchase.
- You’re borrowing money from your investors for a future event and then their money will be converted.
- If their money will be converted in tokens you’re choosing between using an SAFT and Reg A+ the last variation of great deal extensions or Reg D and SAFT is at the front end a convertible note or like a transaction.
- Reg A is no Reg A+. The Reg A+ allows a great deal of versality.
- Reg D is the only way in which to raise money from investors through SAFT.
- If you are raising money for a token to deliver in 6 or 9 months you should use Reg D because you can’t do it whit Reg A+.
- It’s possible to make a security compliant ICO using Reg A+ but it’s not simple.
- The bounty programs or referral programs are sale of securities.
- The bounty or referral programs should be registered.
- The SEC enforcement office should be calling each company onto big enforcement action.
Avoiding SEC jurisdiction by NOT Offering to U.S. Investors
- Don’t use any of the U.S. jurisdictional means.
- Go somewhere where there aren’t any regulations like North Korea or Malta.
- It’s so difficult to avoid the jurisdictional means, the jurisdiction of the SEC and the states.
Compliant ICOs-Focus on the right audience
- They have sold only to U.S persons to accredited, it means compliance is not impossible.
- Many companies have a strong business and they’re attaching a token to it but it isn’t help for your business.
- In today’s market everything changes very fast and when you raise money in an ICO from people that are an unusual mix and not conventional investors you can see a conventional offering like a regular great deal.
- The token will only succeed if it appeals to those people and they want to buy.
- In many cases the people that are adopters of pop chain and bitcoin they’re playing and they failed because their token just didn’t reasonable.
- A utility token that expanding your companies and the services it may be easier to promote by making it an ICO.
- If the exchange is within the jurisdiction of the SEC and they’re not registered as broker dealer or in alternative trading system is like they may well be breaking laws themselves.
- The basic principles are that anybody who puts buyers and sellers of securities can be a broker dealer and any system that puts together broker buyers and sellers of securities can be an exchange.
Converting a security token into a utility token
- If it was a security, you should separate the two utility and security token to find a solution.
- The solution is a rescission offer.
- A rescission offer is the company goes back and says to everybody we sold you this stuff and shouldn’t have done that please give it back to us.
- The problem whit the rescission offers is that they should be based on exemptions.
The use of ERC 20
- The Limitations of ERC 20.
- Some companies have terms and conditions that are on top of the actual smart contract where you could put the customizable stuff.
- If we make a compliant ICO, we are making sure of compliance restrictions.
About the SEC filing process
- The process for Reg A is you file an offering circular.
- Possibly it’s a more complex white paper with a lot of information that’s you can use in the offering circular.
- If you’re going through the SEC you could not be anonymous.
- The company and who’s running it that aren’t in a white paper but are in the offering circular and then risk factors.
- When you file whit the SEC, they have 30 days to get back to you and they get back in about 26 days with comments you then respond to them.
- They have 10 business days to get back to you with further comments and then you’ve got 10 business days again.
- File Form D with the SEC.
- The Form D doesn’t review it by the SEC and the SEC doesn’t interfere in the process.
- The Regulation CF it’s much shorter than a Reg A offering circular.
- Who reviews it probably are plaintiff’s lawyers.
The Cost of a compliant ICO
- The cost of promoting ICO has increased dramatically because the people don’t make small contracts.
- The token software is short supply because a lot more people doing ICO.
- To do a Reg A + the low-end cost is 50K and it can be higher for the legal compliance for the SEC.
- For the token the low-end of the range is 20K.
- Any minimum that has been exceeded can be applied to the marketing of the offering, keep in mind that cash flow matters front-end funding of.
- Probably you’re going to spend $20,000 or $40,000 at least upfront marketing cost.
- In a Reg D the legal costs will not be as much lower so probably the lower-end at the legal range is 20 or 30K and it can be like 50k for legal costs.
- ICO want implement Reg as for non-us investors and then the marketing costs are going to be higher in the U.S.
- In Reg A+ is faster to get all of the legal work than in Reg D and you can use SAFT to bring in money of the token before.
SAFT in a Reg A+ offering
- You could use Reg A for SAFTs.
- When you are going through the SEC process and if you ‘ve got a convertible security. The SEC requires you to file the thing you’re offering in the SAFT, that’s going to raise some issues with the SEC and you should be prepared for a long process.
- You don’t use SAFT for Reg A+ because you can to avoid complexity of 90-day journey through the SEC.
ICO Bounty programs
- There are some bounty programs where people are motivating others promote their offering but you are doing a securities transaction.
- The issuer has to find an exemption to fit into compensating people for promoting your offering.
- The stock towns are now subject to section 17B of the securities Act. Which makes very easy for the SEC to enforce.
- It is not advice to fall into celebrities with a lot of money touting your coin, since now they are known as stock town and people is starting to disclose their activities on how they get paid, how they are being paid which is a violation to the Securities Act., you saying for every 60 investors from your tweets we’re going to give you 50 bucks more token because you’ve just made them into an unregistered broker dealer.
- If you put in the terms and conditions of an SAFT in a Reg A+ this is sufficient but in the case of Reg D it need a 506C variant for the company raising money to verify the accreditor take reasonable steps.
Listing on token and conventional stock exchanges
- Reg D is a method to list the company on a major exchange.
- In ICO that’s okay because you ‘re using the section 2 RG which is having to register the company as if it were a public company.
- If the holder of record has 500 equity holders of record you have to register with the SEC.
- If your token wasn’t registered whit the SEC and you’re selling in the aftermarket in the U.S you should avoid selling your token unless it is a utility token.
Reg D restricted securities
- Reg D purchase would from a U.S investors that they aren’t able to sell that token until their holding period has passed.
- The Reg D they sell to accredited only those people holding restricted securities.
- The restricted securities don’t easily resell can’t sell it to the public because you need an exemption for that you register or find available exemption.
- You are going to have make sure that the smart contract is coded such that you know long it has been since the companies sold that security.
Combined Reg S and Reg D offerings
- If the security of the token was issued subsequent to an SAFT that one year holding period starts when the token start, not at the beginning of the SAFT.
- Reg S you can do a combined offering that is Reg D U.S investors and Reg S or international investors.
- Reg S has safe harbors which say that if you comply with these conditions, you are for sure outside the U.S.
- One of those conditions is no offers or sales in the U.S.
- If you have a combination offer the Reg S metrics shouldn’t appear to a U.S investors they should see the Reg D metrics.
- Always going to have risk factors.
- In the case of a Reg A you need to have a financial statement for to indicate if this security that you’re offering is good or not.
- In the ICO the risk factors leave the market take your decision here it doesn’t involve the SEC.
- ICO adjust to who it is been to more conventional investors and also, we’ll see conventional metrics.
- A company can issue a securitized security token and utility token.
Holding period, SAFT, Discount for early investors
- You are not just going to know if someone in an anonymous blockchain situation is accredited or not, unless you have somehow coded everything to identify accredited persons in the initial offering and to whom they transfer on the blockchain.
- The tacking period, the one year holding period, would start when the SAFT is issued as opposed to when it´s exercised.
- If there is a SAFT involve and then later converts into a token that is a security, nor saying that the twelve-month holding period for the security starts when the SAFT is purchased.
- The SEC is measuring how long the money´s been at risk so if you put the money up with the SAFT and then the SAFT converts in accordance with the algorithm set out in the SAFT then the tacking period applies.
- Given the tender to practice in ICOs are offering discounts for early buyers, that is easier to do, delivering a similar equivalent in Reg D than it is in Reg A+, in Reg A+ as long as you avoid the 20% valuation change.
- If you exceed 20% then you have to go back and might take a longer time to get approval from the SEC.
- Selling a token in the YS as a security under Reg D but as a utility outside the US will depend on the laws of jurisdictions into which you are selling.
Can a Reg A+ ICO token be listed on cryptocurrency exchanges?
- Under Reg A+ the tokens can be listed on crypto currency exchanges, not during the selling process but after the issuance of the tokens to the investors.
- After that, they are allowed to trade them in the aftermarket and then they will typically be sold on crypto currency exchanges because that it’s the only easy place to do so.
- For those exchanges you should make sure that they comply with registration or regulations of the place of operations.
Can you issue under Reg D and resell under 144A restricted to QIB?
- Qualified institutional buyer 144 A it’s a rule which permits the trading of securities.
- It was intended to address the trading of euro bonds.
- You could absolutely issue under Reg D and sell under 144 A to QIBs.
Benefit of a US-company offering an ICO
- There are cases where companies would be better off doing conventional offering because of the nature of what the total would end up being.
- It would end up being boring to the ICO community of current investors.
- They will be better to do a traditional offering than an ICO because sometimes it just does not fit, it ends up being more expensive and more time-consuming.
- The primary reason for people leaning towards ICOs is that it looks like a much easier way to raise a large amount of money there are instances where that is clearly the case and that will be a long-term phenomenon, but not for the time being.
- The token has to make sense for the company and it has to be appealing to the investors, one important tool to use is marketing.
- Right now, people have propensity to buy into an ICO but that is changing with time.
What happens if someone transfers tokens to a non-accredited investor, under Reg D?
- It could be that under certain circumstances a person could be treated as being an underwriter under securities, more being involved in the flow of securities from the issuer to the investing public without a registration, this is possible if the issuer took steps for it.
Coding into your smart contractor is a way to prevent or limit, and make sure that people know what the restrictions are, issuers should probably be okay in those circumstances, set it up properly from the beginning.
Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.
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