Initial Coin Offerings

For many startups and small businesses, finding capital for business operations is often difficult. Traditionally, business owners secured capital needed by either taking on debt through a bank loan, selling equity in the business to investors, or funding the business through their personal savings. Though each of these methods secure funds for the business, each presents a setback to business owners in the form of interest incurred, ownership lost, or depletion of savings. In response to these challenges, a new financing option has emerged that may be a viable option for some businesses owners, an initial coin offering (ICO).

Initial Coin Offerings

An ICO is a new method to raise capital by harnessing the power of blockchain technology. Generally, an ICO is a process where a company creates and sells its own digital token in exchange for payment in bitcoin, Ethereum or other digital assets. During this process the company collects capital needed to fund the business, and the investors receive the company’s specialized tokens. The tokens purchased and received by investors are developed with specialized functions that are provided by the blockchain.

Legal Status of Initial Coin Offerings

The Securities Exchange Commission (SEC), the federal agency that enforces federal security law and regulates the security industry, recognizes most coins made available through ICOs are securities. As securities, the coins must adhere to the SEC’s rules and regulations. Currently, there are two traditional SEC regulations available to entrepreneurs and businesspersons looking to raise capital through an ICO. These options include Regulation A+ and Regulation D’s Rule 506(c).

Regulation A+

Regulation A+, which is created by amendments to Regulation A that took effect in June 2015, is considered as an alternative to a small registered initial public offering (IPO) and serves as an alternate or complementary security offering that is exempt from registration under the Securities Act of 1933 (Securities Act). Under Regulation A+, there are two options available for those seeking to raise capital, Tier 1 and Tier 2.

At their core, both Tier 1 and Tier 2 share many similarities. For example, either can make offers to non-accredited investors; neither restricts or prohibits the use of advertising or general solicitation; neither restricts the transfer of the security issued; and each imposes the standard liability to offers and sellers provided by §12(a)(2) of the Securities Act.

However, there are a few differences between the two offerings. Tier 1 limits the maximum offering to $20 million in a 12-month period; does not have an individual investment limit; dot not require investor status verification; and requires financial disclosures to be reviewed. Alternatively, Tier 2 limits the maximum offering to $50 million in a 12-month period; imposes a limitation on individual investments received by unaccredited investors to either the greater of (i) 10% of the investor’s annual income or (ii) 10% of the investor’s net worth; imposes a self-certification verification of the investors; and requires financial disclosures to be audited.

Regulation D Rule 506(c)

Regulation D’s Rule 506(c), due to the benefits it provides investors, is one of the more common and widely used options in raising capital. First, unlike Regulation A+, Rule 506(c) does not put a limitation on the capital amount that can be raised from the sale of the securities; does not require the securities be pre-filed before being sold; does not impose specific financial disclosure requirements; maintains the standard liability on offers and sellers provided by §12(a)(2) of the Securities Act; and allows for efficient closing and issuing of the securities. However, there are some limitations with Rule 506(c), including: (i) the securities can only be sold to accredited investors: (ii) the holders of the securities is limited to 2,000; and (iii) maintains a 1-year transfer restriction on the purchase of the securities.

Looking Forward

As technologies advance and alternative methods to raising capital for businesses emerge, businesspersons will pursue these new approaches to securing capital to fund their operations. Though these new methods may prove to be a reliable alternative to traditional financial methods, the status and treatment as securities will provide new challenges. It is important for those who pursuing these options to stay up to date on the rules and regulations of the new asset class.


The information contained in this post is for general information and educational purposes only. The application and impact of laws can vary widely based on the specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions or inaccuracies in information contained in this publication. Accordingly, the information on this post is provided with the understanding that the author and publishers are not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. Before making any decision or taking any action, you should consult a professional.

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