Some startups are now using initial coin offerings, also referred to as ICOs, to obtain capital funding. With an ICO, a business actually creates a new token or virtual coin they sell and distribute to purchasers using block chain technology, which is also referred to as distributed ledger technology. There has been a discussion about whether an ICO is a securities offering and whether accredited investor status requirements apply. Investors should understand that there is some difference between ICOs and initial public offerings.
ICOs generally do not grant ownership rights in the company – this is unlike stocks that do grant this ownership. Also, ICOs generally do not involve you as an investor lending money to an issuer, unlike bonds and other debt securities.
However, depending on certain variables, an ICO in which virtual coins or tokens are offered or sold may in fact be securities. This would indicate that accredited investor status applies to these offerings as well.
An ICO typically involves the creation of a brand-new virtual coin or token by an organization that intends to raise funds. It works as follows:
A company announces the amount of funds it desires to raise. The fundraising period continues until the money is raised. These initial coin offerings are done online. Purchasers use either fiat currency (e.g. U.S. Dollars) or virtual currency (e.g. bitcoin or ethereum) to purchase the new tokens.
ICO a Securities Offering?
The SEC has indicated that if the offer and sale of coins or tokens in an ICO is a securities offering, then the offering must be registered with the SEC or qualify for a registration exemption. Under one of the most widely used exemptions, investors are typically required to meet accredited investors qualifications such as minimum thresholds associated with net worth or income in order to have the eligibility to invest. Accredited investor status would need to be reached under this type of exempted offering.
Therefore, if an ICO is not registered, accredited investors are likely the only qualified investors available to participate in the offering. There is the potential for non-accredited investors to participate, but most ICOs will likely limit their deals to only accredited investors.