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If you are thinking about launching an ICO, make sure it is SEC Compliant

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ICOs are on the rise and so are SEC Cyber Unit enforcement initiatives.  Last week, I went to the Crowdfunder Educational Series “Introduction to Launching an ICO” at Expert DOJO in Santa Monica, California and heard from some subject matter experts.   Following are some of the pearls of wisdom that I garnered from the series.

“It takes a village to launch an ICO” – Joanne Park, CCO of Crowdfunder.

An issuer planning to launch an ICO must have an expert legal team living in this “village.”  According to the presenters, there are three phases of launching an ICO:

  1. Pre-Sale phase: This phase begins with ironclad disclosure documents including at least a Simple Agreement for Future Tokens (SAFT) and a white paper (see FileCoin for a good white paper example). It is prudent to include a Private Placement Memorandum (PPM) as well.  During this phase, an issuer must make the critical determination whether the token to be issued is a security or a utility because a security is subject to federal securities laws but a utility is not.
  2. Token issuance phase: The token is created during this phase.  Funds raised during pre-sale can also be spent for other purposes, such as maintaining operations, provided these other purposes are disclosed in your white paper.  Security is also a major area of concern and you should have a security expert living in your “village” to prevent a Parity hack situation where hundreds of millions of dollars of investor funds were locked up, according to Dan Rice of Bootstrap Legal.  Dan also recommended “not to put all your eggs in one basket” with respect to cryptocurrency and fiat.
  3. Maintenance phase: You need the right legal team to help you navigate the world of Securities Regulation, maintain compliance and avoid embarrassing situations like returning investor funds or seeking investor signatures after funds have been wired into an escrow account. Having the right infrastructure in place prior to your ICO launch and following proper procedures thereafter will likely be a successful defense against potential future litigation.

“Investors care about liquidity” – Miko Matsumura, founder of Evercoin.

People investing in ICOs believe their investment will eventually result in economic gain.  A cryptocurrency exchange like Evercoin provides liquidity and being listed on an exchange lends the issuer instant credibility.  Miko said legal compliance is like safety equipment and “you don’t have to run faster than the tiger, you just have to run faster than the guy next to you!”

“Big law firms don’t necessarily have the credibility in this space because ICOs have not been around that long” Mark Schwartz, CTO of The Crypto Company.

Mark explained that potential ICO investors will give considerable weight to the people behind an ICO, particularly advisors and the legal team.  It is imperative to be comfortable with your legal team and you may get more bang for your buck by working with a smaller law firm.

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