ICOs seeking to crowdfund their big idea have a quandary: should they register their token as a security, complete with the expense, delays, and paperwork this entails, or should they brand it a utility and hope the SEC doesn’t come after them? Last year, virtually everything was labeled a utility and SEC-compliant crowdsales were almost unheard of. But in 2018, launching a utility token in the U.S. is fraught with risks and uncertainty. To tap into the lucrative U.S. market, the regulatory route is now the only viable path to follow.
Also read: Vinny Lingham Interview: Scaling, Securities and Bitcoin Extremism
Ignorance of Securities Law Is No Excuse
When token sales emerged, they were seen by advocates as a great source of capital that circumvented existing restrictions on fundraising. As it turns out, ICOs can be a great means of raising money, but they are not a new fundraising vehicle that is exempt from the law. For the first half of 2017, ICOs such as Tezos merrily raised funds from U.S. investors under the assumption that their crowdsale was above board because it involved a utility token rather than a security. But as subsequent lawsuits have shown, just because something’s branded as a utility doesn’t make it one.
By late last year, the number of ICOs willing to accept U.S. investors had dwindled to a trickle and projects were tripping over themselves to preface every mention of their token with the words “UTILITY” for the avoidance of doubt. Others have published their responses to the Howey Test as further evidence that their token could not possibly be a security. Well-meaning as these attempts may be, they do not change the fact that most ICO tokens almost certainly constitute a security, a view espoused by
