William Hinman, the Director of the Division of Corporation Finance at the Securities and Exchange Commission (SEC) made some explicit definitions for ICOs, tokens and cryptocurrencies. The major headlines for the SEC ICO regulations were that Ethereum’s ETH is not a security. However, based on definitions, the initial sale of ETH in 2014 would have been a security.
SEC ICO Regulations
Essentially, any token used in a fundraising process that can give investors a return, or investors can get a return on the secondary market by selling the token to someone else is a security. This matter is complicated by tokens such as XRP that are native to a private blockchain. The SEC has gone as far as to make a mock ICO to help educate themselves and investors.
So what are the details of how a project starting now would be compliant with the SEC?
ICOs or other tokenized fundraising methods that want to raise money from investors in the U.S. will have to sell the tokens in either a private placement or in a public offering. The SEC ICO regulations have four categories that set limitations on participants, funding total, advertising and resale of the token.
Regulation A+
- Anyone can participate.
- There are two tiers of funding total: $20 million (Tier 1). $50 million (Tier 2).
- Advertising is allowed.
- Resale is unregulated.
- Must file an offering statement (Form 1-A). Regular reports with the SEC (Tier 2 only).
Regulation CF
- Anyone can participate.
- $1.07 million (Limits on investment per investor depending on income or net worth)
- Advertising is not allowed.
- Cannot be resold in public markets within a one-year period.
- Release annual reports and file with the SEC (Form C).
Regulation D 506(c)
- Accredited Investors.
- Unlimited funding.
- Advertising is allowed.
- Cannot be freely resold in a public marketplace for six months or a year
- No public disclosure or ongoing reporting to SEC.
Regulation S
- Anyone outside of the U.S.
- Unlimited funding.
- Advertising is allowed.
- May not be resold to US investors for a restricted period of time
- No public disclosure or ongoing reporting to SEC.
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