Will ICO and encrypted currency threaten the securities laws?

nnnDuring the break: ICO project does not have a clear product and plan, but it attracts a large number of investors. But its centralization characteristics and other characteristics lead to its potential risk. However, few countries currently regulate it, let alone the uniform standards of the technology in different jurisdictions. Whether or not it is regulated as securities, the challenges to regulators are significant. But its advantage is still very obvious, so you can follow the securities investment in the field of self-care principle buyers.n
nnTranslation: Annie_Xun
nThe market value of the tokens reached $ 90 billion, and the recent frenzied encrypted money items, including a single bitter price, reached a record high of $ 2,911.86, put pressure on legal institutions that classify, regulate and regulate investment activities. ICO, which is compared to the Internet bubble phenomenon, is a new frontier.n
nICO is a way to initiate a new encryption currency or technology development to sell encrypted assets.n
nThis way of financing is not regulated, and is usually a way for companies to circumvent strict, complex regulatory processes.n
nStarting in May 2017, there are about 20 tokens per month sales items, including Web browser project Brave ICO in 30 seconds to raise 35 million US dollars. 2017 Up to now, the company ICO has raised $ 180 million.n
nGovernment regulation is very few, there is no protection of the company’s rights and interests, why ICO is so attractive? What are their uses? How strong are they?n
n2017 The heat of the encrypted currency allowed some commentators to emphasize the rapid approaching bubble stage, but the ICO investment group and the growth of the encrypted currency did not slow down.n
nDefinition and processn
nThe encrypted currency, or the digital currency, is based on a block chain (non-tampering digital book) technology that does not require a supervisory third party to monitor the transaction.n
nICO uses this encrypted currency to raise funds in the case of an application or service-specific asset that is issued on a common block chain (such as an ether square) or a block chain (such as a Tezos block chain) developed by a separate project.n
nICO issued to the token will be the value, and perhaps also with voting rights, and even dividends right.n
nBut in reality, most ICOs use tokens as a sign of future futures for the project, not the shares of the company. These tokens do not grant ownership, but involve supporters in the final product.n
nThis suggests that one of the benefits of ICO is that start-ups that are developed on the chain chain can raise funds without giving up the company’s shares. And compared to the IPO one-time, ICO can be multi-round. Tax concessionsn
nMoreover, companies established through an IPO must pay taxes and investors must pay capital gains tax. In contrast, ICO companies “may not have to pay taxes directly, only investors must pay capital gains tax.”n
nFinally, stock exchanges, listed companies and investors are subject to strict regulation, subject to judicial and industry regulations; and ICO is completely different, almost no regulatory monitoring.n
nWhen the company wants to publish encrypted money, usually draft a white paper, a brief description of the project plan, how much money, ICO project duration and so on.n
nIn the ICO, the company can raise funds through solicitation of solicons with French or other virtual currency transactions, similar to IPO shares. If the funds raised do not meet the requirements, the project will fail and the funds will be returned to the supporters.n
nDifficulty: regulationn
nAt present, there is no consensus on the encrypted currency, such as Japan and Russia that the encrypted currency is French, Bangladesh direct ban Bitcoin, so the implementation of regulatory standards will be a serious challenge.n
nICO brings a series of problems. First, unlike the IPO, companies that do not have tangible products and results raise large amounts of money through the ICO because their “products” are not regulated.n
nThe attraction is that once these projects succeed, these currencies will be redeemable, whether it is data storage or anonymous network services, and even the currency can also appreciate.n
nHigh fraud riskn
nOne of the main problems is that, since there is no regulatory monitoring and auditing, the information received by the individual is often exaggerated, unrealistic, or unrealistic. This will lead to reckless investment.n
nSecond, the lack of supervision coupled with ICO does not necessarily have substantial results, ICO there is a great possibility of fraud. There is also the problem of the chain chain itself, that is, to the center, anonymous transactions can be carried out across the border, which is difficult in many countries in the field of judicial implementation of white paper and listing rules.n
nSo since most ICOs are not associated with specific jurisdictions, supporters may not have recourse once the issuer chooses to immediately abscond.n
nMatt Chwierut of Smith Crown said that despite the signs that the market is maturing, ICO’s use of escrow accounts may allow opportunists to profit from speculation in counterfeit currency.n
nThirdly, unlike the IPO, ICO supporters do not represent the equity of the issuing company, so there is no shareholder interest. Tokers are only valuable in the development of the company, so unprotected, the case of the collapse of the company, the supporters are not recourse. Linked to the previous one, since the lack of government regulation and make adjustments, investors may encounter Ponzi scheme.n
nSupervision n
nThe Securities and Exchange Commission (SEC) is trying to solve the problem is committed to providing services, and issue tokens, but did not complete the development or service of the company. In the United States and the United Kingdom, securities are subject to strict supervision and sales of unlicensed securities will result in large amounts of fines and imprisonment.n
nIn order to sell securities, companies need to follow strict rules, publish business, prospects, management and potential risk details. ICO lacks these requirements and may lead to infringement, and block chains may help to do wrong. Moreover, the lack of legal system to the company was ignored, there are “project risks and challenges.”n
nRegulatory problems are still in the classification stage. From a legal point of view, the point of controversy is whether the token issue is similar to the new securities. If it is securities, will be subject to supervision. If not, do not involve listing supervision, but there will be other regulatory intervention.n
nBut its strength is that it is different from the shares, do not need to transfer ownership, in some cases, can be used as currency. So the token purchased by the investor can be used to participate in other transactions in the field.n
nOn the other hand, the shares locked in the issuing company, so it can be said that no practical function. And the token is not only representative of the value, but also in the field of exchange of other things.n
nNew definitionn
nThomas Linder, a partner at MME in Zurich, Switzerland, says the tokens can be interpreted as “a donation or a permit to prove that the buyer will use the tokens in the future”, giving the function different from the securities category.n
nHowever, changing the terminology does not change the interpretation of the law. If the process is similar to that of the IPO, the operation of the token is similar to that of the stock, and the regulator will supervise the ICO as supervised as the IPO, and must provide a prospectus for stock issuance to meet the listing requirements, Management objectives and so on.n
nAccording to this reasoning, Preston Byrne, chief operating officer of Monax, a distributed book business company and Hyperledger code contributor,n
nn”Everyone knows that its essence and form is in the expected income under the premise that investors buy the product.”n
nnCooley Fintech lawyer Marco Santori said that if the tokens as a way to invest enterprises, buyers have a profit forecast, it can be said that ICO must be in accordance with the US Securities Act for Howe Test (Howey Test).n
nHowever, Santori explained that it is unclear whether the classification of encrypted currency mining and other currency users, especially whether the currency through mining or purchase to obtain, so the classification of investment is also very difficult. In general, Santori tends to change the ICO approach in the future by regulatory means.n
nStrategic cooperationn
nRecently Deloitte Deloitte and the Russian chain-chain solutions company Waves began working together to provide “ICO integrated services”. Waves will use this strategy to shape the encrypted currency regulatory environment, showing that the encrypted currency leader can reshape the judicial environment.n
nThe Ontario Securities Commission (OSC, Ontario Securities Commission) has organized a hacker marathon to investigate the encrypted currency community and measure how the next step is regulated.n
nHowever, after all, the ICO does not fully comply with any traditional investment or financial instrument category and the regulation of the fact that the impact of classification and supervision, coupled with the tokens transactions and their centralization of the characteristics of the supervision work has long way to go, full of technology and hardships.n
nThe key question is how the guidance issued by government agencies or legal institutions will govern unregulated, unregulated, and anonymous transactions involving both parties.n
nRegulatory: subtle balancen
nThe strong reaction of securities regulators could stifle innovation, and the inability or hesitation can not protect investors.n
nDevelopers who like to finance with ICO must emphasize encryption currency risk, volatility, and application-centricization.n
nMost fraudulent or false statements claim often occur afterwards, and the disclosure of significant risks may prevent defenses or fraudulent allegations if they are found to be less than expected or propagated later. Investors must counteractively look for and acknowledge the risk factors in the white paper because it shows that the legal team has understood the ICO and has made a concise feedback.n
nIs ICO more risky than investing unicorn companies or creative? Perhaps the concept is very new, understanding is not comprehensive, the traditional understanding will limit innovation, as is responsible for Bloq’s block chain leader Jeff Garzik described ICO as “less regulated cents shares.”n
nin conclusion n
nIf the encrypted money company does not want to be regarded as securities, then ICO’s securities classification will cause problems. Investors who use it as shares and shares, regardless of their decentralized and unregulated nature, may involve regulators at a bad time.n
nThe buyer has always been a strong legal principle, then why in such a cognitive and curious stage was abandoned it?n

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