Legal support of ICO

The legal nature of ICOs and cryptocurrency in general remains insufficiently regulated, both in Europe and globally. At the same time, some states are promoting the development of these technologies in their territories, including blockchain technologies. Nowadays, raising funds in the form of cryptocurrency through ICOs is becoming an innovative way of investing.

An ICO is a type of cryptocurrency financing through which startups can raise capital by issuing tokens on a blockchain and then distributing the tokens in exchange for a financial contribution.

How does the ICO work?

The legal regulation of tokens differs depending on the type of token used.

According to FINMA guideline 04/2017 tokens are divided into the following types:

• Payment tokens are tokens that are intended to be used now or in the future as a means of payment for the purchase of goods or services or as a means of transferring money or value;
• Utility tokens are tokens that are intended to provide digital access to a blockchain-based application or service;
• Asset tokens: Asset tokens represent assets, such as debt or equity claims against an issuer. Asset tokens promise, for example, a share in a company’s future revenues or future capital flows. Thus, in terms of their economic function, these tokens are similar to stocks, bonds or derivatives. This category also includes tokens that allow physical assets to be traded on blockchain.

It is also worth mentioning the existing Howey Test cited by the U.S. Supreme Court in SECURITIES AND EXCHANGE COMMISSION v. W. J. HOWEY CO. et al. in 1946 to determine whether a transaction qualifies as an “investment contract” and therefore would be considered a security. The test is important in that some cryptocurrencies and ICOs may be subject to U.S. securities laws during the test.

In doing so, the Supreme Court has established four criteria for determining whether an investment contract exists. An investment contract is:

• investment of money;
• in a joint venture;
• with the expectation of profit;
• to be obtained through the efforts of others.

Howey Test was later adapted by Peter Van Valkenburgh in “Framework for Securities Regulation of Cryptocurrencies”. According to this document tokens are divided into:

• Utility token – NOT a security;
• Security token – a security.

And the distribution of these two types was determined according to the criteria mentioned above.

ICO vs IPO

ICO is a peculiar form of investment, which appeared due to the popularity of cryptocurrencies, is nothing more than raising funds for a project. An ICO is a sale of a cryptocurrency, not a security. For this reason, it has no formal rights like an IPO.

An IPO is an initial public offering on a stock exchange. In simple words – the sale of a company’s securities to all comers. A company that wants to conduct an IPO must carry out a number of legally significant actions, such as: applying for registration with the Securities and Exchange Commission and obtaining its approval.