ICOs, Regulations, and Litigation
Initial Coin Offering (ICOs) is a financing method that is currently pulling in billions of dollars from amateur investors. Regulatory agencies are taking notice of it and making extensive efforts to enforce oversight over them. Policy analysts and commercial litigators predict that this combination of events will lead to a barrage of lawsuits.
Like initial public offerings (IPOs), ICOs are a way to raise money in forms of shares. The main difference is that the money comes in form of digital tokens or coins. The tokens are usually traded against other digital assets, or used to be redeemed for a service.
Lawsuits that involve token issuance can truncate the implementation of ICOs. This can also create new practice areas for law firms as many investors might be seeking for indemnification for the tokens they were issued. Moreover, entities who have these offerings in the future might consider to seek for legal means to lessen the risk of facing regulatory penalties.
The year, 2017, is known by many as the year of the ICO. Throughout this year, ICOs have accumulated over $1.6 billion in venture capital. Of that amount, Tezos Foundation, a company working on a new blockchain platform, raised $230 million worth of token. Millions of individuals are starting to participate in the offerings in hopes to make a quick buck. Many invest without adequate knowledge in what they’re investing in. This induces high market speculation and volatility among those tokens.
Government agencies, like the Securities and Exchange Commission (SEC), are putting in effort to establish oversight over ICOs and other digital tokens in hopes to improving investor understanding of how individual tokens can be classified.
A minority of the ICOs do offer innovative services to all sorts of industries. However, many sneakily commit fraud by misguiding investors about their technology and token distribution. The United States SEC gave out warnings and memorandums cautioning consumers about the risk involving ICOs. The People’s Bank of China utterly banned ICOs in the country September 4.
Investors can file lawsuits against ICO companies, however these cases are very intricate considering the lack of current virtual currency regulations. It is difficult to determine the general characteristics of ICOs or other digital tokens, because many of them function differently. Hence, many companies might not be in compliance with regulations including state money transmitter laws, AML rules, and registration under the SEC.
The nascent market is experiencing a drastic change right now. It is heavily unregulated and participants are ill-informed about the risks involved in the market.
Felix Shipkevich is a principal of Shipkevich PLLC.PLLC. His practice focuses on providing counsel to FinTech and financial services firms, including financial technology, payments and emerging digital currency space. He has spoken at national panels in the money transmitter space and payments industry. Mr. Shipkevich’s payments practice has brought him into contact with money transmitter registration requirements in all fifty U.S. States.
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