U.S. authorities classify most token sales as securities offerings. Thus, strict regulations apply. That’s the main reasons why most non-U.S. issuers exclude U.S.-based investors.
Earlier this year, Singapore-based BitTorrent Foundation’s token sale made headlines when raising $7.1 million in less than 15 minutes. Some already announced the revival of the golden ICO age.
Reading the small print, there is this:
“Users from the following countries aren’t able to participate in the BitTorrent token sale on the Binance Launchpad platform: Afghanistan, Albania, Belarus, Bosnia & Herzegovina, Burundi, Central African Republic, Cote d’Ivoire, Cuba, Democratic Republic of the Congo, Ethiopia,Guinea, Guinea-Bissau, Iran, Iraq, Lebanon, Liberia, Libya, Mainland China, Myanmar (Burma), North Korea, Republic of Macedonia (FYROM), Serbia, Somalia, South Sudan, Sri Lanka, Sudan, Syria, Thailand, Trinidad & Tobago, Tunisia, Uganda, Ukraine, United States of America (USA), Venezuela, Yemen, and Zimbabwe.”
Usually, when we read about the U.S. in connection with North Korea, Iran, and Afghanistan, token sales may not be among the first things that come to mind.
However, it has become common among token issuers to blacklist U.S.-based investors. In Q1 2019, 86 ICOs did not accept U.S.-based investors, making the country by far the most restricted jurisdiction, followed by North Korea, Iran, and Syria.
SEC classifies most ICOs as securities offerings
The reason why U.S.-based investors are often excluded from ICO participation is the recent ICO-crackdown of the U.S. Securities and Exchange Commission (SEC).
Jay Clayton, Chairman of the US Securities and Exchange Commission (SEC), said that virtually every ICO he has seen qualified as a securities offering and the SEC is “not going to change rules just to fit a technology.”
Thus, the SEC requires most ICOs to adhere to their strict securities laws and regulations, which makes the fundraising model unattractive to many issuers. In the U.S., a securities offering must either be registered with the SEC or qualify for an exemption.
In any case, STOs will be limited in how they market and to whom they sell to – and they are almost always restricted to accredited investors. As per U.S. law, it is the responsibility of the company organizing the token sale to make sure non-accredited U.S. investors are not being on-boarded.
Blocking U.S. investors is not that easy
However, in practice, this is not so easy to accomplish. While firms can take steps to prevent most U.S. citizens from investing, these measures can be bypassed.
At this point, it has become common practice to ask investors if they are US citizens, but who can verify if the answer is correct? Another way is to use geolocation to block US citizens, but then again, this can be easily bypassed with a VPN or proxy.
So far, the SEC has not taken many actions, but the watchdog has announced this will change. Once that happens, things will get interesting. Many ICOs in the past have not taken the necessary steps to prevent US investors from participating.
Moreover, US securities laws can also be enforced upon non-US companies. Therefore, it is important for issuers to be legally compliant. Violating US securities laws is not something any company wants to deal with.
SEC issued new guidelines on how to classify tokens
Last week, the SEC issued new guidelines on how to qualify digital assets as securities. The so-called “Framework for ‘Investment Contract Analysis’ of Digital Assets” does not include any new laws or amendments to current law, it is solely a set of guidelines that help issuers to assess whether the federal securities laws apply to their sale.
Thus, the issuance of these guidelines has not changed anything. They simply clarify what has already been out there for a long time and how to apply it in the case of digital tokens.
In short, every asset that passes the so-called Howey-Test qualifies as security:
- An investor must acquire the investment using money, whether in the form of fiat currency, another asset, or another type of consideration.
- The investment contract must involve a “common enterprise.”
- The investor must have a reasonable expectation of profits derived from the efforts of others.
These criteria are fulfilled by most token offerings, hence, the crackdown of the SEC.
On the other hand, the guidelines also describe when a token is not considered a security:
- If the token is limited in terms of its value
- If the token can be used as a substitute for currency, meaning, if it can be used to purchase goods or services
- If deriving a profit from the token’s value appreciation is secondary to the use of its functionality
- If the token can serve its purpose immediately
- If the token is more aligned to meet the needs of the users, rather than providing speculative value
- If the involved ledger network is fully operational and developed
Clear now? Maybe. There is a lot of room for interpretation and loopholes. To be on the safe side, issuers always need to discuss with a qualified lawyer.
European and U.S. securities laws differ
Issuances that are classified as Security Token Offerings under European law have to comply with securities laws anyway. However, European STOs also oftentimes exclude U.S.-based investors. Bitbond’s STO website, for example, reads:
“Natural persons to whom U.S. American or Canadian tax law applies may not participate in the Bitbond STO.”
Even though an offering might comply with European securities laws, that doesn’t mean it also complies with U.S. securities laws. Moreover, even if it does comply with U.S. law, having U.S.-based investors on-board will add additional administrative and regulatory workload.
Therefore, issuers who plan on selling tokens in the U.S. need to seek advice from a specialized lawyer. Many companies choose to exclude U.S.-based investors, but that doesn’t necessarily have to be the best way. It depends on the specific circumstances of the STO.
Disclaimer: The content on this website is provided for general information purposes only and does not constitute legal advice.