2018 promises to be a record-breaking year for launching an ICO. It seems as if this novel new fundraising mechanism is here to stay, raising more than $350 million per month in the second half of 2017. The amounts raised through ICOs are steadily beginning to rival those raised by series A funding. At a median of $15 million per ICO, this is not a trivial achievement. And the implications of this opportunity is monumental: it provides a feasible alternative to solicit startup funding in the early stages of your company. Before you launch an ICO, however, ask yourself these four crucial questions.
Question 1: Is the Digital Token a Meaningful Part of Your Business Model?
Despite the allure of launching an ICO, it is not for every company. At its most basic level, an ICO entails fundraising through the issuing of a cryptocurrency as a mechanism to buy your company’s product. Not all products are equally suited for cryptocurrencies. Consequently, ICOs are not equally beneficial regardless of business model and product.
Understanding whether your own token (or coin) offers unique utility to future users of your product is always your first step toward launching an ICO. If you are going to issue a token merely for purposes of exchange, it might be necessary to reconsider your decision.
There are two reasons for this. The first is related to the regulatory implications of issuing tokens for exchange only (more on this in question 4 below). The second reason is market-driven and equally important: if the token that you release has no fundamental relation to your product, it will be subjected to the highly volatile cryptocurrency market, exposing you to high levels of risk. The only way to avoid this is to ensure that there is an enduring demand for your token: driven by the real, tangible utility that your product (potentially) offers.
Question 2: Have You Defined and Planned your ICO Structure?
Depending on your business needs, you will have to decide how much you want to raise, how many tokens you wish to issue, and how you will structure your token sale. Your options include capping the amount of tokens you issue, determining a percentage of tokens kept aside for insiders, as well as deciding to let the market determine your token price or to set a fixed price.
The best option here depends on your business needs – do you want a highly centralized or diverse body of token holders? How long until your product becomes viable? How do you foresee demand for your product developing? Be sure to have answers to these questions before deciding on your ICO structure.
Question 3: Do you have an Impeccable White Paper?
Your white paper is essentially the prospectus with which you will to to go to market. The document should set out the technical aspects of your product, its value proposition, a description of your token, as well as your token generation and distribution strategy. Your white paper has to be rigorous, thorough, and convincing. Spend a lot of time and resources on perfecting it. You won’t regret it. Once you have your white paper and your marketing strategy, you are ready to reach out to ICO exchanges to list your token.
Question 4: Are You Compliant with all ICO Regulations and Requirements?
From a legal perspective, there are two very important factors to consider before launching an ICO. The first is whether your token is considered a security by the Security and Exchange Commission (SEC). Amongst the categories of securities regulated by the SEC, you’ll find the pernicious definition of “investment contract”. An investment contract is considered “an investment of money in a common enterprise with a reasonable expectation of profits derived from the entrepreneurial or managerial efforts of others”.
The purpose of this SEC regulation in case of investment contracts is to prevent companies from issuing tokens on the basis of a promised service or platform that is never delivered. If your token is considered an investment contract, you will be subject to the provisions of the Exchange Act and SEC regulation.
Determining whether or not your token is considered a security will depend on the economic and market realities of your product. If you suspect that you might be subject to SEC regulation, that might influence your decision (1) not to go forward with the ICO, or to (2) decide where you want to incorporate the legal entity launching the ICO, and (3) who you’d want to prohibit from being involved in the ICO. Each of these decisions will have regulatory implications.
The second important legal consideration, independent of the legal nature of your ICO or token, is to establish the necessary legal framework to address anti-money laundering and counter-terrorism financing concerns by ensuring you have due diligence processes in place.
Consult a Cryptocurrency Lawyer
These legal considerations can seem overwhelming, but they need not be. LawTrades works with experienced cryptocurrency lawyers all over the country who can help you navigate the ICO process.