Blockchain ICO's and Securities Regulation in the U.S.
On July 25, 2017, The Securities and Exchange Commission issued an investigative report cautioning market participants that Initial Coin Offerings may be subject to the requirements of U.S. securities laws. The SEC left open whether a particular investment transaction involves the offer or sale of a security, which depends on "the facts and circumstances, including the economic realities of the transaction".
Today, Juan Batiz-Benet, Jesse Clayburgh, and Marco Santori, senior counsels in FinTech at the prominent Cooley law firm released a whitepaper entitled The SAFT Project: Toward a Compliant Token Sale Framework asserting that almost all pre-functional sales of utility tokens are securities, and most post-functional sales aren’t. The paper further introduces The SAFT Forms, legaldocuments used to convey rights in tokens prior to the development of the tokens’ functionality. These forms provide a framework for sales of pre-functional utility tokens to accredited investors in the U.S.
Assuming SAFT is adopted as effective guidance, this is an important and helpful step in discerning what ICO's (often now called a Token Generation Event or TGE) are subject to U.S. securities which limit sale to accredited investors, or require public filings if sold to the general public.
SUMMARY issuing a token in an ICO before that token has actual utility is likely a security and subject to U.S. securities law. Issuing a token that has immediate and actual utility on issuance (other than a share in profits or equity stake in the venture) is probably not a security. The SAFT forms are helpful legal documents for selling equity tokens and utility tokens that do not yet have utility.
For a more in-depth discussion of the SAFT Forms, check out Mark Santori's supporting article: Appcoin Law: ICOs the Right Way.