ICOs, Token Sales & Compliance

Token Sales and Initial Coin Offerings (ICOs) are the new fundraising vehicle for startups, mostly from the blockchain scene. The basic mechanism is as follows: to participate in an ICO or token sale, a supporter sends digital money (Bitcoin, Ether) to a wallet owned by the listing company and receives digital tokens/currency issued by the entity doing the ICO/token sale. In moste of the cases companies issue utiliy-tokens, which can be seen as digital coupons, giving the investor access to features of a particular project. These tokens do not confer ownership — but they can be traded on crypto exchanges that provide a liquid market, if desired.

This means that the project offers to investors units of a new cryptocurrency (their token) in exchange against cryptocurrencies such as bitcoin or ethereum. In some cases fiat money and credit cards are accepted as well.

Clearing up some terms:
ICO (Initial Coin Offering)
is a term created to describe Bitcoin clones and other “coin” clones that represent digital money that makes use of blockchain technology. Using distributed ledger technology to build digital money is the most prominent yet most simple usage of blockchain technology, with Bitcoin being the role-model. Coins only have one utility — they store value (Bitcoin e.g.).

But blockchain technology can do so much more — Ethereum for example is highly programmable and allows the creation of SmartContracts, allowing complex application making use of blockchain technology. Bitocin produces “coins”, Ethereum generates “tokens”. A token sale or token launch is something based on Ethereum, an ICO is something happening with Bitcoin or some Altcoin (alternative coin). From a technical view, tokens are not “offered”, they are “generated”. That is why the accurate phrase for an Ethereum token launch, is to describe it as a “Token Generation Event (TGE)”,

Concerning tokens, we have to divide them (at least) into two groups:

  • Utility Tokens: Utility tokens are digital coupons giving investors access to the features of a particular project starting at a later date. Tokens can be traded on exchanges, if desired. They do not give ownership in the project/company.
  • Securities: In contrast to utility tokens, token sales can be done as registered securities offerings. This means the token offering may include equity or some form of an investment return. For the issuer this means complying with the regulatory requirements for securities.

Altogether, this new type of fundraising offers some advantages for the issuer:

  • Alternative to classic Venture Capital: The ICO issuer will keep its 100% stake in his company after the token sale
  • Decentralization / Democratization: Funds can be raised in a decentralized manner taking advantage of security and transparency features a blockchain offers.
  • Regulation: ICO/token sale regulation is still evolving. The regulatory requirements are not as high as with other types of fundraising mechanisms.
  • PR: Staging a token launch often results in building an online community, and allows presenting a project to a broad public audience.
  • Liquidity / Exchanges: Tokens can be traded on transparent markets, which often are more liquid than privately held stocks.
  • NGO / Non-Profit: ICOs can be used as a vehicle for non-profit organizations to raise capital in a transparent way.


In any case (ICO/token sale) most issuers are considering voluntary compliance with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. The regulatory mandates for an ICO/token sale depend on the selected jurisdication, token type and target audience. The current AML system is based on existing centralized financial services systems. By default, these guidelines cannot account to the same extent for a finance system based on anonymity offered by cryptocurrencies.

Jumio (https://www.jumio.com/2017/11/ico-aml-kyc-compliance/) sums up the advantages of voluntray compliance as follows.

1. Establish Credibility with Banks

Strong KYC during the token generating event will make it easier to work with banks and follow AML regulations.

2. Get Ahead of the Compliance Curve

Until the murky regulatory waters become a little clearer, it’s best to be transparent especially when dealing with potential regulators. Because regulatory bodies in many large markets (e.g., US, Canada and the UK) are leaning towards classifying ICOs as securities, ICOs must be more proactive and comply with AML/KYC guidelines to operate in these markets.

3. Long Term Legitimacy

Any business that wants to succeed in the long run, and not just take the money and run, needs to understand the existing legal framework and ensure compliance.

4. Improved Public Perception

With all the current hype and excitement about ICOs, the lack of explicit regulations makes them a potential haven for fraudsters.

5. Expanded Reach

Voluntary AML/KYC compliance may help issuing ICOs reach a larger audience and expand the number of jurisdictions in which they can participate.

6. Post Funding Tracking

If you’ve opened up your ICO to U.S. investors, for example, you will need to think about how you can prevent them from selling your tokens in the first 12 months (if you raised under Regulation D).

7. Avoid Regulatory Fines

In many jurisdictions, the regulatory bodies are levying heavy penalties if the ICO smells like a security because of money laundering concerns.

The bottom line we draw, is that complying with AML/KYC regulations voluntarily, offers a broad range of advantages. In doing so the ICO/token sale receives a better credibility, investors get protected and legal risks gets minimized.

Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Please conduct your own research before investing in any cryptocurrency. You should not rely on this post as legal advice. It is written for general informational purposes only, as a guide to certain of the conceptual considerations associated with the narrow issues it addresses. You should seek advice from your own counsel, who is familiar with the particular facts and circumstances of what you intend.



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