ICO issuers must mind the gap in regulations, or pay later | PaymentsSource


Like new cryptocurrencies, ICOs are subject to the growing pains of early adoption, including a myriad of security, perceptual, and compliance issues.

As the latest fundraising phenomenon, ICOs (Initial Coin Offerings or Token Sales) offer a much-needed answer to startups with limited funds who are facing countless challenges in raising money and solvency.

The reason? For one, the financial regulation surrounding ICOs is grim at best. There is confusion and disagreement about what it means to conduct legal and compliant token sales, including whether issuers should adhere to know-your-customer and anti-money laundering or AML regulations. KYC is the method by which issuers verify the identity of their investors. Even after the SEC discussed this topic with its Release No. 81207 on July 25, 2017, it remains unclear whether a token is actually a security.

The SEC declined to provide a bright line test, instead stressing that each sale must be viewed individually. However, the SEC isn’t the only regulator enforcing securities regulations. The plaintiffs’ attorneys, attorneys general, and state securities commissioners will all follow these sales with interest.

Meanwhile, the same nebulous regulations surrounding ICOs also make them a potential haven for scammers and others who either don’t want to register their offering or want to provide the public with adequate safeguards. This could mean trouble for funders who have a financial stake in the process, because if an ICO is neither regulated nor registered, investors will not be able to offset their losses if something goes wrong.

While many of the security issues are still being ironed out, companies considering leveraging ICOs as a fundraising vehicle must be equally careful to adhere to KYC and AML regulations and ensure they are in their legal structuring, documentation and due diligence proceed thoroughly. Simply put, voluntary compliance in a token sale will give the project a stamp of legitimacy. As a result, many budding regulators have made it clear that they are open to token sales as long as KYC laws are followed.

In addition to legitimacy, tracking KYC / AML compliance will provide ICO issuers with enhanced public awareness that can help companies later gain credibility with their customers. In addition, voluntary KYC / AML compliance can also help ICO issuers reach a larger audience and expand the number of jurisdictions in which they can market. Voluntary compliance with KYC and AML guidelines gives companies the opportunity to partner with global investors and financial institutions as the business grows.

And until the murky regulatory waters clear a little, organizations need to stay one step ahead of the compliance curve to avoid potential fines, audits, and controls. This means that organizations need to be as transparent as possible, especially when dealing with potential regulators. At the end of the day, demonstrable due diligence efforts will go a long way in overcoming the anticipated headache of working with investors, financial institutions, and regulators that will inevitably come on the way.