Since the cryptocurrency mania hit in 2017, there has been no trendier, and in many cases, no more successful way to raise money than to sell tokens in what has become most commonly known as an “initial coin offering” or “ICO.”
There are dozens of cautionary tales written to potential token investors, and certainly a cautious approach is a wise approach when considering any purchase, including cryptographic tokens. However less commonly discussed are the issues companies should consider when when contemplating going down the token sale path. Many legitimate companies stare down this path every day, trying to decide whether a token sale is for them. Because like the investor experience, a company can also face a number of perils in the crypto token realm, and for the uneducated, these perils can be fatal.
For companies looking to raise capital, and thinking a token sale may just be the ticket, here are one key business consideration and one key legal consideration to contemplate prior to putting all of your eggs in a cryptographic basket:
Business – are you able to communicate your company’s need for capital with sufficient detail and clarity to be compelling to the audience from whom you are seeking capital? This fundamental business point applies regardless of the form of capital raise you are undertaking. What is the problem your business is trying to solve? How will it do so? How much money is needed, and how will that money be spent? These are the basic questions every company must be able to answer with absolute clarity prior to commencing any capital raise. Cryptographic tokens are not a panacea for shortcomings in a business plan. The euphoria of 2017 is over, and token purchasers have gotten sophisticated fast, and they will separate a solid business concept from an opportunistic one almost instantly.
Legal – are you selling security tokens, or utility tokens? This is the most fundamental question to ask yourself before commencing any token offering, because the answer affects every facet of your offering – from the attributes your tokens can have, to how you market your tokens, and who you sell them to. It is the process of analysis leading to this answer that is of critical importance to every token issuer. If your tokens are securities, there are strict rules you must follow, including the form of legal agreements needed to properly document the sale, and the post-sale reporting and disclosure obligations. Securities rules also extend to the buyers of security tokens, by imposing tight limitations on a token-holder’s ability to resell tokens. While many companies in the early days of ICOs, whether through ignorance or willful disregard, ignored securities laws, selling security tokens without complying with securities laws can have serious repercussions. Securities regulators can halt your token sale, force you to return the sale proceeds to purchasers, fine you, and bar you from future capital raising initiatives. The stakes are too high to start down the ICO path blindly. Be sure you have a knowledgeable legal advisor who can assist in determining whether your tokens are securities, and what that means to your company and its token offering.