The Securities and Exchange Commission (SEC) has determined that the U.S. securities laws are applicable to most Initial Coin Offerings (ICOs) – subjecting the digital currency (coins) sold under these offerings are subject to regulation as securities. This has caused some concern among proponents of ICOs related to the possibility that the government’s intervention may tamp down the market. However, as discussed below, savvy issuers will likely rely on the familiar safe harbor exemption from registration requirements per federal law – Regulation D, Rule 506(c).
Startup companies use ICOs to raise capital in digital currency form, such as Bitcoin or Ethereum, in exchange for digital coins issued by the startup – many of these coins are digitally equivalent to the SEC as a share of stock (i.e. a security). As such, in order for a company to sell these new coins as securities in an ICO, it is required to register securities with the SEC unless an available exemption is utilized. Much of the traditional appeal of ICOs has been their supposed freedom from SEC regulatory control. This is why companies may turn to the exemption under Rule 506(c), which also includes the accredited investor provision.
ICO Market
Is the SEC’s intervention in the digital currency market going to diminish the enthusiasm for this new avenue of fundraising? Well, let’s look at what has happened.
Within only a few weeks of the SEC issuing its report that outlined the necessity of ICOs adhering to federal securities laws, more than $300 million of additional funds were raised through ICOs. It has also been reported by the New York Times that 46 new coin offerings have been publicized and 204 others are moving forward on schedule – all since the SEC made its announcement.
The Exemption and Accredited Investor Requirement
Issuers who rely on the common exemption provided through Regulation D, Rule 506(c) will be able to avoid much the regulation and expenses imposed by federal securities laws, but they must only accept investors for these private placements who are verified as accredited investors.
An individual with a net worth of more than $1 million is one way in which to qualify as an accredited investor. Wealthy angel investors and private funds often have this type of money in U.S. dollars. However, net worth refers to fair market value of total assets which include all real and personal property minus the value of the primary residence and liabilities. High income earners can also qualify as accredited investors.
Most likely, many holders of Bitcoin and Ethereum possess more than $1 million fair market value of digital assets. Thus, these individuals may qualify under the provisions of Regulation D, Rule 506(c), something which bodes well for the continuation of the ICO and digital currency marketplace.
