Choosing the right jurisdiction is key.
Your ICO or one that you are looking at participating in, does it pass the Howey test and will it remain in compliance?
As for the USA… You and your team should have a firm grasp of what you are proposing to offer the public and where.
The Supreme Court, in issuing its decision finding that the defendants’ leaseback agreement is a form of security, developed a landmark test for determining whether certain transactions are investment contracts (and thus subject to securities registration requirements). Under the Howey Test, a transaction is an investment contract if:
It is an investment of money
There is an expectation of profits from the investment
The investment of money is in a common enterprise
Any profit comes from the efforts of a promoter or third party
Although the Howey Test uses the term “money,” later cases have expanded this to include investments of assets other than money. The term “common enterprise” isn’t precisely defined, and courts have used different interpretations. Most federal courts define a common enterprise as one that is horizontal, meaning that investors pool their money or assets together to invest in a project. However, other courts use different definitions.
The final factor of the Howey Test concerns whether any profit that comes from the investment is largely or wholly outside of the investor’s control. If so, then the investment might be a security. If, however, the investor’s own actions largely dictate whether an investment will be profitable, then that investment is probably not a security.
Substance Over Form
In deciding Howey, the Supreme Court created a test that looks at an investment’s substance, rather than its form, as the determining factor for whether it is a security. Even if an investment is not labeled a “stock” or “bond,” it may very well be a security under the law, meaning that registration and disclosure requirements apply. After the creation of the Howey Test, some promoters masqueraded securities to try and escape registration requirements (such as by calling an offer of securities an interest in a general partnership). To deal with these charades, courts look at the economic realities behind an investment scheme, rather than at its name or form, to determine whether it is a security.
If an investment opportunity is open to many people, and if investors have little to no control or management of investment money or assets, then that investment is probably a security. If, on the other hand, an investment is made available only to a few close friends or associates, and if these investors have significant influence over how the investment is managed, then it is probably not a security. Source: https://consumer.findlaw.com/securities-law/what-is-the-howey-test.html
Seek legal advisement. Secure legal advisement. Follow legal advisement
Blockchain startups like many starts ups are cash strapped. One of the things that in the early stages that goes neglected is a legal budget. If your ICO whitepaper is showing real promise and value, an early stage partner that happens to be in law could well be a perfect match for you if you have not made already made plans for in house or general counsel.
In the crypto space it is not odd to offer a lawyer or law firm your token in lue of cash or tokens and cash or a mix of various instruments. They could well see that shaving off the legal bill in whole or in part depending on what you negotiate could well be in thier best interest and yours if they have a stake substantial enough. Just like any other “partnership” or venture agreement.
Choosing the right jurisdiction is key.
Given the data, we will look at the following countries/territory for our analysis:
- Cayman Islands
Though not a country, this British Overseas Territory boasts itself as being one of the most interesting regions for structuring an ICO. Through its stable political and legal platform, it has seen many offshore company formations, many of them being institutional clients as they prefer vigorous regulatory and legal frameworks pertaining to the international standards, rather than operating under a merky regulatory environment which would be more adapted to speculative initiatives.
This strong regulatory and legal ethos naturally makes this BOT one of the most attractive and reliable areas to start an ICO.
At the same time, one of the concerns for those thinking of starting an ICO campaign is to understand the nature of the token issued. Specifically, if it passes the Howey test (as described above) it will be considered as security, potentially exposing itself to the purview of SEC and other regulatory bodies’ oversight. However, some experts suggest that the definition of “security” as specified by the Cayman Islands’ related legislation does not apply to an ICO token, a favourable factor that facilitates the token sale process.
Although there still exists certain degree of legal ambiguity in its crypto ecosystem, we see this as the country’s regulatory authorities taking time to ensure that the supervisory structure for all the blockchain initiatives is properly set forth instead of them trying to delay the structural implementation in an attempt to attract as many fintech entrepreneurs as possible in a shadowy legal environment.
ICO initiatives with a clear set of goals and well-structured roadmaps will see the most success because of the Cayman Islands’ vigorous legal and regulatory ethos, not despite it.
Case study: Block.one
It appears the Cayman’s are a great place to domicile if not then just to incubate your ICO / Project and then take it to another jurisdiction. Singapore and Switzerland come with a cost in more fronts than one. If the cash is on hand to look at Switzerland and or Singapore it is advised to look into it early on. Shop your project around, you can find some world class legal support and investors overseas that sells out your coin offering sooner than you think.
On the other hand, the Cayman’s offer a rapid and safe sandbox and a long term solution for a world class cryptocurrency project / company / foundation. With regulation and red tape the cost of formation and compliance is decidedly more favourable in the Cayman’s for an upstart coin project. If participants believe in the platform and the directors the jurisdiction it legal is domiciled in are of no concern and does not necessarily mean a red flag. There is Old / Big money on the islands as it is notoriously known for. In conclusion a funds strapped crypto / blockchain project or ICO might well find world class counsel, savings, and favorable legal safe haven.
- *ICO tokens are less likely to be classified as securities, making them less subject to “harsh” regulatory oversight
- *Supportive community/governmental bodies are present, encouraging the fintech startups’ development
If you are looking for advisement for your blockchain project please feel free to contact me if you believe we should talk or even collaborate.
Contact me @: firstname.lastname@example.org
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