In the adapting and ever-growing landscape surrounding blockchain technology, it can be difficult for projects to ensure they’re staying compliant with regulatory obligations when launching Token Generation Events.
TGEs are a disruptive and modernized version of crowdfunding that allows projects to leverage blockchain technology in order to raise funds and offer digital tokens to members of the public.
While TGEs continue to serve as an exciting method for raising capital, overcoming and understanding regulatory guidelines can be a significant obstacle. Findings from a Foley Cryptocurrency Survey in 2018 found a widespread sense of regulatory confusion among respondents. Further, it found that most believe the industry lacks a well-grounded understanding of how existing elements of financial regulation may already apply.
This is concerning, as there are major legal considerations that should be taken into account when launching a TGE, especially for the purpose of offering a ‘security token.’
Understanding the Difference Between a ‘Security Token’ and ‘Utility Token’
As digital tokens and cryptocurrencies reached a higher point of public understanding this year, 2018 observed many debates on how various token offerings should be classified.
A quintessential example of this was the case with Ether; the digital currency that powers the Ethereum network. Its regulatory status in the U.S. was the focus of debate when the Securities and Exchange Commission questioned if it should be listed as a security. In the eyes of some SEC regulators, the initial Ethereum crowdsale had a primary intention of profiting and should be subject to securities laws.
Ultimately, the SEC decided that Ether is not a security, much to the warm reception of proponents. The reason that this decision was important was because selling securities involves further obligations for projects in order to stay compliant with existing financial regulations. However, the decision for Ether is not applicable for many of the other token offerings on the market.
Experts predict a similar approach from Canadian lawmakers. The Canadian Securities Administrators (CSA) said that simply calling a project a ‘utility’ is not enough. If a project operates as a security, there are certain regulatory guidelines that must be followed regardless of how the token is ‘branded.’
According to blockchain technology lawyer Addison Cameron-Huff, the 1978 Supreme Court decision of Pacific Coast Coin Exchange v. Ontario Securities Commission is an important case for understanding the law surrounding securities in Canada. It presented the following test for securities:
- An investment of money
- In a common enterprise
- With the expectation of profit
- To come significantly from the efforts of others
Offering security tokens is legal when the associated regulatory obligations are met. According to the CSA, “businesses should complete an analysis on whether a security is involved [in their offering].”
Who Can Legally Invest in My ICO?
In Canada, it is completely legal to engage with cryptocurrencies, digital tokens, and crowdsale efforts. To date, the country has taken a measured approach to the industry, hoping not to stifle innovation. In fact, the Ontario Securities Commission recently called maintaining this balance one of its key priorities for the 2018-2019 fiscal year.
However, several regulatory obligations apply when selling or investing in securities. Among other factors, these obligations involve only permitting investors to buy or trade the security token once they have been identified, per Know Your Customer (KYC) and Anti-Money Laundering (AML) obligations.
Does Regulatory Compliance End After the Crowdsale?
An area that can prove confusing is understanding when exactly regulatory obligations apply. A misconception is that regulatory compliance ends after the initial token crowdsale.
This, however, is not the case. Teams are encouraged to act responsibly in ensuring their business stays compliant. Doing so will help to avoid incurring any potential penalties or civil consequences.
What are the Potential Risks and Penalties for Non-compliance?
If projects or businesses are found to be conducting their security token crowdsale without following Canadian securities rules, there can be several forms of penalty. Perhaps the most common of these are regulatory penalties, which can involve fines or even forced closure.
Alongside regulatory penalties, there can also be potential civil penalties for those that fail to comply with securities laws.
Which Experts Should I Talk to?
Collaborating with experts can be beneficial when navigating complicated legal obligations. This is especially the case in the blockchain and fintech industry, which is in a constant state of growth and evolution due to its nascent nature.
Ideal experts to consult with include lawyers with expertise in the field surrounding digital tokens and their underlying technology. Further, prominent projects or services that are familiar with financial guidelines in your country can help provide assistance to make the process less daunting.
With Rocket 2.0, Etherparty Simplifies the Security Token Process
Etherparty is a platform offering various blockchain software products, with the mission of removing the burden associated with presenting offerings to a national or worldwide audience.
Rocket, our first platform, served as a token distribution event showcase to help entrepreneurs meet their goals. As the most user-friendly token crowdsale creator in the market, Rocket allows users to launch and track their project without relying on a development team of their own.
Following its success in simplifying the process of launching and offering utility tokens, Rocket 2.0 is Etherparty’s solution to the more nuanced world of offering securities. With the platform, existing end-to-end solutions can deploy security tokens with a feature known as the Real Security Token Standard (RSTS).
The new iteration of Rocket also helps ensure that all blockchain project documentation is both transparent and secure. With the platform, projects engaging with security token crowdsales can find the support they need.
Contact [email protected] to find out more and sign-up for a free trial of Rocket by Etherparty; the user-friendly platform that lets you set up, launch, and track your token crowdsale without a development team.