An ICO isn’t the first scheme that has been used in raising capital. Lots of techniques have been used in the past to avoid applying the security laws. The main standard for understanding if a token is a security or not is the ‘Howey Test’ This rule was created for the determination of transactions that qualify as investment contracts by the Supreme Court. How do you know if an ICO Token is a Security?
It comes down to knowing the nature of your token while considering the following questions:
Is it an investment that involves money?
Do you expect profits?
Does it arise from a common enterprise?
Does it depend solely on third party or promoter efforts?
Why is this important?
It is crucial for new ICO token generating events to be clear on what the token offers to the token holder. It must be clear and easy to understand for individuals to exercise their rights associated with the platform and proposition.
To be viewed as a security, the offering must meet all 4 factors mentioned above under the law. Transactions in this category are also considered securities and are subject to some registration and disclosure requirements, except the securities sold or offered in exempt transactions.
In a new cryptocurrency ICO, the promotional material linked with the sale will be assessed in determining whether it’s a security. So you need to discuss with a lawyer to review the documents, the token terms, the website to ensure that no language will misrepresent what the ICO is offering the community. Such things can easily be misconstrued if they are not clear enough.
Hopefully, this simple introduction on how you can tell if your ICO is a security will start you off properly. Be sure to consider those 4 factors and consult a lawyer. This article should not be used in place of legal advice.