A cryptocurrency phenomenon is quite a novelty for the financial sector, and it follows that once a crypto-frenzy had begun to spawn, the world was not ready to embrace it at once.
The authorized financial watchdog has failed to elaborate suitable and efficient frameworks to regulate a newly born investment tool if indeed it is a security — until today fierce debates are revolving around the nature of crypto-related securities issued during the ICO events.
Utility Token vs Security
The tricky thing is that lots of ICO holders claim their crypto-tokens are nothing like securities instead, they operate as utility tokens that do not represent ownership over assets and therefore can not be regulated.
And there is a specific reason behind such claims. It is widely known that a process of initial coin offering, aka ICO, stands for a blockchain-based analogue of initial public offering (IPO) used by companies seeking to raise money for further project development.
Those who have ever held an IPO know that it requires an enormous amount of accounting and legal legwork with a hefty price tag on it. Moreover, because of some legal peculiarities, which ultimately cut off small and medium investors, an IPO has very limited investment opportunities for startups, thus fostering a competitive edge of ICOs.
Nonetheless, once the project is recognized as a security, it means that all of these restrictions are applicable to an ICO as well. That is why ICO holders are so desperate to prove their project to be a security-free event.
However, there is a solution that might draw an end to the ever-lasting war between ICOs and regulations and it is glancing with irony since the great solicitor is none other than the Security and Exchange Commission itself.
Back in 2015, the SEC implemented two new regulations, Regulation Crowdfunding (C.F.) and Regulation A, that make it easier for companies to raise funds, especially from distributed pools of investors.
These regulations allow projects to raise between $1 million and $50 million without going through the costly requirements of a traditional public offering.
While Regulation C.F. unveils a registered broker-dealer or funding portal that allows projects to raise over a million dollars to small-time investors, Regulation A allows a company to raise up to $50 million without going through the strict IPO process.
Surprisingly that despite these regulations were implemented over three years ago, numerous crypto-startups only now have started to take an advantage of these regulations.
At the moment, only 30 companies are registered as broker-dealers or funding portals. Many of these portals are only raising limited amounts of funds, in-operational, or do not service the crypto markets.
Nevertheless, these regulations have a vast potential to unlock a gateway of crypto-startups aiming to collect funds through a token distribution without any penalties and legal costs.
In addition, both Regulation C.F. and Regulation A have many strings to improve investors confidence as well as an ability to attract swaths of newbies keen on an idea to raise millions in compliance with the SEC.