You have a business that needs cash or you wish to start one. You intend to raise money from public investors. Should you register shares of your company and do a traditional IPO (Initial Public Offering) or a new ICO (Initial Coin Offering)? No one had asked me that question before about 10 weeks ago and about 20 people have asked me since.
The simple answer is: it depends.

It depends on who you are, what your business does, how much money you intend to raise and how much you have to spend to put your offering together.

The threshold question is how you should structure your offering. Companies have been using traditional IPOs and other securities offerings for decades. ICOs have become faddish in the last year or so and more so in the last few months. If you do an ICO correctly you might just raise a lot of money very quickly.

The least expensive way to offer and sell tokens is to make certain that your tokens cannot be considered to be a security that would be regulated under the securities laws. If someone buys a token today for $100 and all they get is permission to shop on your website or use your technology later on, then what you are selling is probably more akin to a Costco membership than a security. But even some memberships have been deemed to be securities so the issue is far from clear.

The US Securities and Exchange Commission (SEC) issued a Report in July discussing the issue and there have been a plethora of articles on the subject, most of which have centered on a single court case, SEC v. Howey. There have been 80 years of additional cases interpreting Howey that many of the commentators have ignored. The SEC Report cites to more than thirty and that is only a partial list.

I know a lot of good lawyers who are wrestling with this question right now. If you are raising money from the public, you will need a good lawyer. Most of the token offerings I have personally reviewed would probably be securities. Many lawyers will advise clients to treat a token offering as if it were a security and make the proper disclosures, just to be safe.

You should also consider the fact that a good attorney writing a token offering (ICO) is likely to be expensive. This is really uncharted territory and any good attorney who undertakes the assignment will want to do it slowly and methodically to protect the client and himself. I have asked around if any attorney malpractice carrier has affirmatively agreed to cover a token offering and no one has told me that they have, so not every good securities lawyer will even take your money for an ICO.

IPOs are not cheap either so the next question is how much money do you want to raise? Under US law an IPO is a registered offering. The paperwork must follow specific guidelines and must be filed and reviewed by the SEC. There are also restrictions on the advertising that an IPO can do and when it can do it.

Historically, an IPO was always done through an underwriter, usually one of the Wall Street investment banks. Legal fees can be high and the underwriters can charge a lot as well. The larger investment banks tend to stay away from purely speculative investments. I have yet to see a major investment bank take on an ICO. All of the ICOs that I have seen have been self-underwritten.

With the JOBS Act a company can raise up to $50 million using a website instead of an underwriter. The JOBS Act provides for a simplified registration statement and at least one of the major crowdfunding websites, StartEngine, has announced that it intends to begin offering ICOs although no timetable has been announced.

The answer to how much money you want to raise should have some connection to what you want to do with the money. If you have serious business with a serious business plan and an idea of how much it will cost to follow your business plan then it is relatively easy to decide how much money you need to raise.

If your reason for doing an ICO is that it would be “cool” to have $100 million lying around I do not necessarily disagree with you. At the same time, if ICOs are going to succeed as a tool of corporate finance, then sooner or later that idea is going to get old from the investor’s point of view.

There is a middle ground called Regulation D or a private placement that allows companies to raise an unlimited amount of money from wealthier, sophisticated investors. The Reg. D market raises far more money than IPOs every year. The offerings are still securities but do not have to be registered with the SEC and are cheaper and can be prepared more quickly.
I looked at a token offering that was being made under Reg. D that had been prepared by one of the better law firms. I thought that they had basically nailed the disclosures that needed to be made with the exception of the fact that they neglected to mention that tokens kept in electronic wallets have been susceptible to frequent hacking and theft. That offering was about a month ago and if I was writing one today I would also include some disclosure about the recent volatility in the crypto-currency market.

Although the principals behind the company that made that particular offering were in the US and the offering written for investors in the US and about a dozen other countries, the company itself was incorporated in the Cayman Islands, a well known tax haven. Regulators are already skeptical of ICOs and doing one out of a tax haven is like painting a target on your back inviting regulatory scrutiny.

If you are trying to find investors for an ICO, a small IPO under the JOBS Act or a Reg. D private placement then you need to have a marketing budget because you are selling your offering by yourself. For an ICO it will certainly help if your company is involved with block chain or you have a long list of contacts that are. If you have to explain block chain to potential investors at the same time you are explaining crypto-currency it will necessarily make your fund raising task more difficult.

There is also some value in adopting the idea that if your token offering is going to be scrutinize or considered to be a security by regulators, then call what you are selling stock and be done with it. There are a number of ways to raise an adequate amount of money without diluting your own percentage of ownership.

Irwin Stein / 40-Year Experienced Corporate, Securities & RE Attorney



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