Initial Coin Offerings: Are They Legal?

By Cliff Ennico

March 6, 2018 6 min read

It seems like only yesterday — wait, it WAS only yesterday — we were trying to wrap our brains around cryptocurrencies like bitcoin and Ethereum.

It seems like only this morning — wait, it WAS this morning — we were trying to figure out what a blockchain is all about.

Now for the newest buzzword for creative finance: the initial coin offering, or ICO.

An ICO has nothing to do with an initial public offering, or IPO, although it sometimes looks like one. An ICO is the bastard stepchild of something called "project crowdfunding."

In a project crowdfunding, an individual or a company tries to raise money online to finance a project. The project can be just about anything, for example:

—An author looking for money to live on while she writes her next novel.

—A couple looking to finance infertility treatments so they can have a baby.

—An inventor looking for funds to patent his latest creation.

Investors in project crowdfunding are not buying stock in a company. Instead, they are promised something if and when the project is completed and successful. That something can be just about anything, for example:

—An autographed copy of the novel once it is published.

—The right to name the baby if the infertility treatments are successful.

—The product that results from the invention.

In an ICO, the investor gets a "token," which can represent just about anything. It can represent a share in any profits from the project; it can entitle the bearer to a free case of a craft brewery's newest India pale ale; or it can represent the right to buy X units of Ethereum. Like a share of stock or a commodities contract, the token can rise or fall in value until it is used or sold. Many investors in ICOs don't care at all what the token represents — they just want to sell it at a profit once the project generates marketplace buzz.

So, who cares about ICOs?

Securities regulators care — a lot. In the U.S., if the token in an ICO is an investment contract, it is a security regulated by the U.S. Securities and Exchange Commission. In a landmark U.S. Supreme Court ruling from 1946, an investment contract is defined as "a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial ... whether the enterprise is speculative or non-speculative or whether there is a sale of property with or without intrinsic value" (SEC v. W.J. Howey Co., If an ICO token represents a share in the future revenue or profits of an enterprise, it's illegal unless the ICO is registered with the SEC or falls within one of several exemptions.

The SEC isn't the only regulator out there, however. Most states have "blue sky laws" regulating securities that are often tougher than the federal rules. Regulators in Massachusetts recently shut down an ICO offering so-called "Caviar tokens" that gave investors the opportunity to buy cryptocurrencies and flip real estate (see

Think you can avoid U.S. law by limiting your ICO to overseas investors? Think again. Several countries — including the People's Republic of China and the Republic of Korea — have banned ICOs altogether. Even if you limit the offering to countries where ICOs are not regulated, you need to take steps to prevent U.S. residents from buying them overseas or foreign investors from reselling to U.S. residents (what the SEC calls "blowback"). Even if one of your tokens ends up in the hands of a U.S. resident, your whole offering may be blown to smithereens.

Additionally, your other investors may not be happy with your ICO plans. ICO offerings, if not properly structured, can dilute the ownership stake that you promised to your early-stage investors, including friends and family members. An increasing number of venture capital contracts I'm dealing with right now prohibit outright any sort of crowdfunding, including ICOs.

Finally, there are the ICO investors themselves. Rule No. 1 of venture capital law: If investors are disappointed, they will sue. Even though you say clearly in your offering documents that there is no guarantee the crowdfunded project will be successful, you are creating expectations in your investor community. If the project doesn't come to pass, or if the token's value disappears due to circumstances beyond your control (like SEC or state rulings that prohibit offerings like yours), the torches and pitchforks will come out and you will be facing an angry mob.

I'm not saying ICOs are always illegal. It's just that we don't yet have enough guidance from the government to know when they will be legal. Until we do, you shouldn't even think about an ICO without consulting a securities lawyer who specializes in them. For more information, check out my book "The Crowdfunding Handbook," available wherever books are sold.

Cliff Ennico ([email protected]) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our webpage at

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