Tech start-ups that issue digital tokens to raise funds are falling in line with U.S. securities laws or seeking legal ways to skirt them after the Securities and Exchange Commission (SEC) said it planned to regulate the market.
The issuers are increasingly filing their 'initial coin offerings (ICOs)' with the SEC, adding customer checks, barring U.S. investors or halting fundraising after the regulator said it will hold most token offerings to the same standards as share sales, more than a dozen ICO lawyers and executives told Reuters.
"It's better to pay the cost upfront than to have the SEC come after you and shut you down," said Armin Ebrahimi, CEO of Silicon Valley-based ShoCard which is preparing for an ICO in May.
Until recently, hundreds of start-ups raised billions of dollars with few investor protections or customer checks. Backed in many cases by formal legal opinions, those companies believed that as issuers of "tokens" they did not fall within the SEC's remit. However, SEC chair Jay Clayton said in February he believed most digital coins were effectively securities and should be regulated as such.
The SEC has also launched multiple probes, saying many coin issuers, their lawyers and advisors may have breached its rules.
Spooked U.S. law firms are now advising digital coin clients to be much more cautious, according to several lawyers and executives.
"Most credible law firms will not give an opinion that the token is not a security," said Richard Levin, chair of the fintech and regulation team at law firm Polsinelli.
No digital coin issuer has yet launched a public offering akin to a stock exchange listing, but many are now structuring their deals like traditional private share placements.
North Carolina-based energy settlement platform Causam eXchange is one of many companies offering tokens under the SEC's 'Reg D' rule which allows firms to sell securities to accredited investors subject to know-your-customer checks and a holding period.
Causam CEO Joe Forbes told Reuters he had chosen the structure so as "not to go to jail."