Raising money using crypto-securities – the pitfalls
A new trend is emerging in bitcoin 2.0: the crypto-crowdsale. This is not an innovation per seas fiat crowdfunding has existed for a number of years. However, with the crypto-crowdsale, what is being sold is not a security on the surface but a token.
Every crypto project needs funding to get off the ground, however, it is imperative to get some solid legal advice if you intend to do a crowdsale. Many countries are sensitive about businesses selling investments to their people. In the UK, a financial promotion needs to be approved by an FCA authorised firm before you can access UK retail clients – there are some exceptions but it is not simply a matter of saying that you are selling your token to ‘professional investors’ without understanding how specifically those types of investors are defined. Under UK law, you also can’t sell shares to the public without a prospectus approved by a listing authority when you are raising over a certain amount from the public.
The usual counter argument from the crypto-community is that the token is not a share; it is a token to access a piece of software. That could be fine in theory, but be careful that the form of the token does not have any attributes of a security. In the US, the Securities Act 1933 refers to “any profit sharing agreement”, so if your token also shares the spoils generated by your crypto-project then watch out that you haven’t just created a security. Securities in the US are registerable or exempt; the analysis of whether an exemption applies is similar to the UK in that it requires a bit of thought, analysis and research.
Another red herring is to say that the project is run by a non-profit association and that, therefore, you are exempt from any form of securities regulation; it is not as simple as that and, in particular, if your spin-off commercial projects from your initial fundraise then a regulator will look at substance over form in determining whether any charitable fundraising exemptions apply to you.
Lastly, a crypto-security is a bearer share in that possession determines ownership. In some countries such arrangements are prohibited – mainly for AML concerns. So if you are issuing a security, make sure you have structured it to avoid possible bearer share issues.
It’s great to see Overstock want to create a new world order stockmarket and democratise financial services further, but the laws still exist and still apply. The safest way for you to raise money issuing a crypto-token is to get some sound legal advice before doing so and go through a regulated broker.