Legislation and Laws Governing ICOs

The rising popularity of cryptocurrency and the blockchain technology makes it hard for governments and lawmakers to stay up to speed with everything happening in the crypto space. One of the key pillars of blockchain is that it’s free from regulation.

However, even in the absence of proper regulation, blockchain projects such as ICOs are never exempt from the law. Against that backdrop, ICO owners should ensure that the projects remain compliant to avoid accidentally going against the law.

Forming An ICO project

One of the key legal issues to address before you launch an ICO project is the structure of the business. If you don’t decide properly on the structure of the project, it may fall under general the partnership in which all founders take personal responsibility for the actions performed in the course of the business.

A good practice when launching an ICO project is to have a separate operating entity from the token issuer. This is important for two main reasons: to separate legal liability and to choose different business entities based on the function of each entity. For instance, foundations and trusts are usually ideal for running ICOs, but a non-suitable option when it comes to running a business.

The main benefit of a separate structure is the possibility of having two entities in different fields. The operating entity could be in almost any field provided the project is compliant with the prevailing laws. Alternatively, the token issuer could come from a field with flexible laws. The most important aspect of an ICO is the location of the investors and not the issuing entity.

Choosing The Right Jurisdiction

While the level of legislation in the crypto space and blockchain remains low, several government authorities have begun to issue guidelines for ICO investors operating in the respective countries. This could be seen as some progress in the crypto space, even though the guidelines might not be 100% ideal, as several changes take place in the sector. It is also critical to know that the laws are created to protect the investor and to make the crypto space more transparent.

With that in mind, regulations and guidelines might vary significantly between different fields. Several factors inform the formulation of such regulations and guidelines, some of which include:

  • How the authorities recognize cryptocurrencies
  • Securities laws
  • Consumer and investor protection laws in a particular jurisdiction
  • AML regulatory frameworks
  • Willingness to promote blockchain technology

A good number of jurisdictions are proactive and ready to welcome investors into their territories with an aim of helping them succeed. Here are a few things to note when choosing a jurisdiction for your ICO project.

Cooperation With The sector

Some jurisdictions may have very flexible frameworks, which may be ideal for traditional industries. However, that flexibility might not augur well with crypto-related projects such as ICOs, which are new and disruptive. It is advisable to work with an industry that focuses on inspiring innovation, small business growth, and entrepreneurship. With an open policy and cooperative approach, you can find it easier dealing with services such as opening bank accounts or getting additional business and corporate services.

Access To Legal And Industry Support

Any collaboration to launch an ICO project will be to little or no avail without a proper legal and industry support. Running an ICO requires direct interaction with legal and industry authorities on a regular basis. The jurisdiction you choose to work with should give a direct access to a knowledgeable authority that you can easily reach with concerns.

Consumer And Investor Protection

Always work with a jurisdiction that protects the interests of your investors and consumers. This makes them feel more secure to invest in your project. Besides, it gives your project a stamp of professionalism, especially when your clients know they have a place to air their grievances should anything go wrong. Generally, the quality of your regulator depends partly on how well it can protect the interest of the investors and consumers and partly on how easily they can access it when a dispute arises.

Definition Of Cryptocurrency

A precise definition implies that the regulator you choose to work with is already aware or participates in the industry. More importantly, the jurisdiction should be already implementing more structured and definitive laws regarding the crypto space.

Besides, a definition may also indicate whether the regulator is of “coins or tokens.” Remember to read and understand the terms and their definitions based on the jurisdiction you choose.

Industry Advocacy Group

For a successful launch of an ICO project, you should work with a jurisdiction that has an active advocacy group, which works to initiate regulations and a suitable environment for blockchain projects.

This will ensure that the jurisdiction is strong and provides an opportunity for interaction with like-minded partners. More importantly, it provides a reliable to work with when it comes to formulating the policies of your company.

Types Of Corporate Formations

An ICO project is a decentralized and international small business, which requires various structures in order to operate. Structuring the business is not easy. Therefore, it’s critical to ensure that the jurisdiction you choose has proper legal framework for your project.

In the blockchain and crypto space, it is essential to have a foundation that governs your community and accepts tokens. Equally important is to have a business structure that meets your needs. You can achieve this by working with the experts in the field to help you determine your needs. The following are some of the major regulators for ICOs and blockchain projects:

  • Switzerland
  • Singapore
  • Hong Kong
  • The British Virgin Islands
  • Cayman Islands
  • Isle of Man

While these jurisdictions may lead in many respects, they all have their respective benefits and drawbacks. When choosing a regulator for your ICO, it’s critical to assess your specific needs and what you might accept to trade off.

Securities And Commodities Laws

Regardless of the number of legal aspects to consider when launching an ICO project, a key element of concern is whether your project falls in the category of securities. The topic was hot following the SEC report that concluded that DAO tokens were securities.

With speculation and uncertainty that surrounds this subject, many jurisdictions are yet to decide on which tokens, if any, fall under securities. Additionally, US Securities laws do not apply to non-US investors. Therefore, some ICO projects target only non-US investors. However, this does not ensure complete coverage, as non-targeted investors could easily mask their location online. Besides, identity verifications on the internet are not always exhaustive.

One of the best ways to figure out whether your ICO project falls under securities is to test it using the US Supreme Howey Test. Even so, you should not take the results derived from the test as definitive since regulators use many other methods to define your token.

Currently, many blockchain-based organizations are out to clarify the uncertainties. For example, Coin Center seeks to simplify the understanding of the regulations through its publications regarding Securities and tokens.

AML And KYC Laws

Financial surveillance laws are essential in nearly all legal jurisdictions, regardless of the legal definition of cryptocurrency. Such laws revolve around Anti-Money Laundering (AML) and Know Your Customer (KYC) rules. Simply put, such laws order that all businesses offering financial services must have information about their clients and share the same with relevant regulatory authorities.

To that end, regulated businesses traditionally have the obligation to obtain a government-issued identification and a utility bill for each customer. However, this rule may vary based on the jurisdiction under which you operate. If, for example, your entity falls under non-regulated businesses, the rules could be fewer.

KYC related activities depend on the definition of the business token. Tokens that fall under regulated entities must adhere strictly to the KYC rules, including other requirements such as ensuring that all token purchasers are accredited investors. Conversely, tokens classified as a utility often enjoy flexible laws.

Crowdfunding Laws

While it sounds revolutionary, the idea of ICOs and raising funds through tokens is not entirely new. Some of its aspects have been dealt with previously, such as the implementation of Title III of the Jobs Act, in which the US government legalized a fair-play crowdfunding for investors who are not accredited. The concept is quite similar to what ICOs seek to achieve—a decentralized funding process that generates funds from a community instead of a clique of venture capitalists. Before launching an ICO project, it’s advisable to analyze the crowdfunding laws in your preferred jurisdiction.

Taxation Laws

Some specific aspects of taxation regarding ICOs are not yet fully defined. Lack of regulation and volatility in the crypto space present a major challenge when it comes to implementing solid taxation laws. However, it’s advisable to work with a regulator that provides a good taxation policy to help you minimize future taxation issues.

Each regulator, depending on the categorization of your token, will need a report on sales tax, capital gains, or VAT. It may require tax report on all of the mentioned areas. Understanding the laws governing your ICO project could help in the management and accounting areas of your project. As a worthy sidenote, make sure to our Bitcoin IRS tax implications guide for all the cryptocurrency investors and traders out there.

Advertising Laws

This legislation relates to the language you use to describe your token. It depends on whether the token is considered a security. This law examines all promotional materials and avenues you use for your project. Therefore, the language used should match the token and the project in question, never laced with jargon and overly technical language.

Similarly, every written statement about the token is open for scrutiny under this law. So, be careful about what you post on social media including Reddit, Medium, messaging apps, and more.

To be on the safe side, you should set particular guidelines on how to describe your token from the start and advise your team to follow suit. More importantly, seek the advice of a legal expert to review your website, promotional documents, and any other material that advertises the project.

Final thoughts

The fast-paced blockchain and crypto community encounters new developments almost daily, making it difficult to implement solid laws for the space. While a lot more needs to be done in this area, following the existing laws mentioned in this post could help harmonize things when launching an ICO project.

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