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What are the laws applicable to the operation of an ICO at any time and in any region?
Read the article to get the answer.
Legal/Regulations of an ICO
The ICO process, as innovative as it seems, and as positively useful as it is, still raises several legal issues. Those are issues we need to discuss at this point in the lessons to help equip you with all the necessary information you need to participate in the ICO space with confidence.
This information is vital because so far in 2018 there has been over $1.5 billion raised by more than 90 ICOs all over Europe, America, and Asia. Since there is no central regulatory body to sanction the parties involved, regulators and legislators are taking an increasingly serious look at how to regulate the industry at the national level. Thus, we need to factually understand and effectively function in a highly fragmented and rapidly shifting legal landscape.
Without sufficient regulation to protect investors and other participants in the industry, the authenticity of ICO fundraising will be called into question.
The most notable example of significant regulatory scrutiny on ICOs came in early 2018. The U.S Securities and Exchange Commission (SEC) said it may apply Federal Securities Law to some ICOs on a case-by-case basis.
It is likely that more countries will continue to follow the lead of the SEC and begin to regulate the industry more carefully, more strictly. But with a clear regulatory framework, companies will have greater clarity how to launch their own ICO, and investors will be better protected too. The net result of effective regulation should certainly encourage more investors to participate in and promote various ICOs.
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“Jurisdictional Laws
This is a major decision and serious challenge faced by most startup firms. Where should operations be located? The location will determine the legal issues involved.
For instance, if a firm is located in Germany, and their early supporters reside in Germany, Britain, and France, then their contracts must conform to the contract laws of all the countries involved.
So, if you are working on an ICO project, take time to do a little research on the contract law for the early investor countries, as well as for your own. The terms and conditions of the contracts you use will need to comply with the laws of more than one country, as your lawyer advises.
As the responsible party for the ICO Regulatory and Legal affairs (whether you are an advisor, team member, or consultant), it is your responsibility to be aware of relevant regulations in each country and know how they apply to your ICO. You will be participating in discussions with all members of the team, given the way regulations are involved at almost every level and aspect of the business.
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“Specific Region Regulations
The Eurozone
The European Union Securities and Market Authority took a stricter stance on ICOs recently, declaring that ICOs represent a high risk to investors. And firms dealing with ICOs will be required to satisfy relevant regulatory requirements.
This suggests that the EU is ready to embrace America’s position on ICOs, which is a reversal of the Union’s previous position. Thus, currently, ICOs are allowed, but will be subject to future targeted regulations.
The United States of America
We can say America is one of the most economically liberal nations on the planet. Currently, ICOs are certainly allowed in the US, but they are heavily regulated.
ICO rules vary widely from state to state. The state regulations vary from no regulations at all; to requiring deposits equal to, or in excess of, all local transactions; to regulations requiring a special license for a business to engage in any kind of altcoin activities.
At the federal level, there are no current regulations banning ICOs specifically, although ICOs are expected to be registered with the SEC, and licensed just the same, whether they are ICOs or not.
Asia (Japan, South Korea and China)
In Japan, ICOs are allowed, but subject to very strict regulations.
China and South Korea have gone one step further and completely banned ICOs. Authorities cite the prevalence of scams as the reason behind this decision, threatening to prosecute anyone who violates their laws.
This has attracted many nationals from these strict countries to the ICO-friendly nation of Singapore where they are welcomed and encouraged to create their ICO.
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” Definition of a Security
Security in this sense indicates that there is a share of stock or financial benefit tied to the token. Since the whole ICO process is unregulated, buying and selling the tokens as securities is a direct violation of most countries’ laws.
In the Howey case, the US Supreme Court created a test to determine what is or is not a security. The test looks at an investment’s substance, rather than just at its form, as the determining factor for whether it is a security or not. Even if an investment is not labeled a stock or bond, it may still be a security under the law. Full registration and disclosure requirements would apply.
To be defined as a security, a token must:
Be an Investment of Money: Investors must have paid an actual amount of money (or some other asset of equally clear monetary value) to invest in the token.
Have an Expectation of Profit from the Investment: Investors must have expectations of profit from the business in which they are investing.
Have the Investment of money be in a Common Enterprise: The profit must be expected to, and actually come from, the efforts of others, i.e., the investment is largely or wholly outside of the investor’s control. If the investor’s own actions largely dictate whether an investment will be profitable, then that investment is probably not a security.
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“Definition of a Security
§2
When defining your ICO model and token use case, it is of paramount importance that the Legal Officer pay attention to whether or not your token is likely to be classified as a security, or even whether it is just dangerously close to being classified as a security.
Securities laws in general are complex and confusing. Different courts may apply different tests for determining whether an investment is in fact a security. The ICO team is certainly advised to consult with an experienced Securities Lawyer in all cases.
Many ICOs do not accept money from US resident investors specifically because of the possibility of having a loose interpretation of “security” applied to their token. If the SEC decides the ICO token is a security, then the regulatory framework shifts dramatically, and the team is faced with not only different operating regulations, but also the possibility of jail time and fines for breaking the law.
As we said before, the physical location of your project is a very important decision for the team. You must understand your target investors, your end users, as well as the associated regulatory environment in which you will be operating.
Pay attention to recent cases, legislation, and the national debate surrounding cryptocurrency. Legal and regulatory frameworks are in flux right now, things are changing very quickly, and you do not want to be caught on the wrong side of the law.
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“Ensuring Contractual Validity
For a contract to be valid, the parties involved must all agree to its terms. As with most paper documents, signatures are required and appended as legal proof. In the case of ICOs, we are dealing with investors from all over the world signing documents provided to them in digital form. So: “How do all the parties agree to a contract that is digital?”
Although each country has its own specific legislation regarding what constitutes a legally binding contract, the broad premises of what is required across the majority of countries are:
-The counterparty must have read and understood the contract, and this needs to be verifiable to some degree.
-The counterparty must actively agree to the terms of the contract. An example is a signature, a positive affirmation of the document’s contents.
Contract administration primarily rests with the team member responsible for legal affairs, but this is also an area where the project needs help from trained specialists. Especially when the ICO involves more than one country, it is important to be in very close contact with the regulatory advisors and other responsible parties. You want to ensure both the enforceability of your contracts, and also that the project does not get trapped in a morass of legal problems.
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“Checklist for before your ICO
If you are the legal officer of your ICO, there will be times when you are not the most popular member of the team. Sales function has a strong investor relations component, Marketing function is producing tangible leads and evidence of their work, Legal might look like, or feel like, it is just holding back the project.
The role of Legal is to ensure every contract the company makes is binding and enforceable. But just like in the real world, counterparties re-neg, contracts are broken, regulatory bodies or prosecutors make unexpected pronouncements and do other things that will confound you.
Doing the appropriate due diligence, using common sense and making reasonable efforts to follow specified legal procedures, you can ensure that you are not only in a legally defensible position, but that you also demonstrate the seriousness of your ICO project.
The Checklist:
-Assess and finalize the nature of the ICO token and its purpose.
-Finalize which countries your ICO will operate from as a base of operation.
-Finalize which countries will be able to invest in your ICO and who your end users will be (from a domiciled perspective).
-Ensure all contracts are enforceable in each domicile for each counterparty.
-Employ and interact with lawyers in each country in which the project is involved in order to be sure the project is operating legally, and also to enjoy the defensive advantage of having diligently sought professional advice in each jurisdiction.
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“Marketing/PR in an ICO
Once the legal foundations of the company are soundly established, the next step is to begin promoting the ICO. In a largely digital space, the steps to raising investor awareness are dramatically different from traditional start-ups, and we will cover all of these factors below.
The basic truth is that without investors, your start-up will obviously fail. The success of your company and ICO rests on how strongly you are able to market it.
Before we go into detail about conducting a marketing and PR campaign, it is important to recognize that even the best marketing will not be able to overcome fundamental flaws and weaknesses in the company, the ICO structure, or the team.
Also, once an ICO has gained a certain amount of public attention it becomes increasingly difficult to make further changes to the company scope and token metrics. Everything you do in the process of Marketing and PR shapes the narrative as to how your ICO is seen by the broader market.
Things to consider before Marketing an ICO
Why your Investors are investing.
Carefully consider the interests and motivations of your investors.
For example, an early investor is taking substantially more risk than those who come later. The early investor expects a greater return for his money.
Bonus tokens are often promised as one way to reward the early investors. That would be a decision mostly coming from the financial and business development functions, but it is very important to marketing also.
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“Things to consider before Marketing an ICO
§2
Make Security a Priority
As we have mentioned, the unregulated nature of cryptocurrencies makes investors more anxious than usual about an ICO. Make sure to keep this in mind in your marketing material, and take time to explain the security of your project tokens.
Make use of an escrow wallet that guarantees the safety of investor funds, and make provisions for a safe return of their cash in case the soft-cap is not reached. You will engender confidence in your project simply by knowing all these items are in place.
Your Team Matters
Be aware of star power. You might think about using celebrities in your promotional campaign. There are good reasons why Nike pays Christiano Ronaldo a lot of money to appear in Nike commercials. Investors and consumers both have a positive response to a celebrity endorsement.
But in the current climate, we can still say the most important thing for your ICO may be having an all-star team. That is likely always a top priority for the investors. The investors will rightly be paying the most attention to the team members because those are the people who will be implementing the project roadmap.
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“Things to consider before Marketing an ICO
§3
Be sure to present your team in a transparent and appealing light for the most efficacy in marketing. As we have mentioned before, make sure your team has the appropriate social media profiles, and no embarrassing or inaccurate articles are published about them.
The person responsible for Marketing/PR will need to collaborate closely with other team members. It is wise to consider various other business decisions from the perspective of marketing as well. The ability to market the project is central to the success of the ICO and as such, the success of the company.
Build your ICO project Marketing/PR Lenses
We can hardly stress this enough, your ability to market your ICO is critical to the success of your venture. Decisions at all levels and times should be made while taking the marketing perspective into consideration as well.
For example, if you have an idea that is already being done in both the traditional and crypto space. it is important to stress how you can be different from the competition. If you simply attempt to do the same idea, and follow the same press kit, you are unlikely to succeed. You are more likely to do even worse than your competition. Your company offers no compelling reason for an investor to spend his money on your tokens.
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“Things to consider before Marketing an ICO
§4
Be Transparent
You need to be accountable, transparent and honest. Investors have purchased your token with their hard-earned money and with the expectation they make a good return on their investment. Uncontrolled gossip and unannounced moves can make investors nervous about the likelihood of making a profit.
Good Governance and clear communication will keep investors comfortable that you are investing their funds wisely. If the marketing department can communicate with investors plainly and sensibly, that will lead to a positive circle of benefits for investors and the company too.
First, the investors will certainly be more comfortable in good and bad times if you have already established a base of clear and reliable communication. Second, there will be a more personal and intimate relationship between the investors and the project. This kind of personal involvement is like a commitment to the project. This allows you to be honest about setbacks without being worried there will be a sudden rush out of the project token. Finally, by marketing with upfront and honest communication, maybe you will not get such an angry hoard of investors overwhelming you with messages when either things go wrong or they realize this isn’t exactly what they signed up for. That can save you and the whole team a tremendous amount of work and anxiety too.
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“When Should ICO Marketing Start
The difference between failure and success in an ICO is, more often than not, in the Marketing/PR. So, do you need to wait for the whole project to be finished before starting any significant Marketing/PR? Absolutely not!
Planning a strategy to market your ICO project should be one of the first things you do. In fact, some people say the marketing plan is even more important than the project itself. Maybe they are right, or maybe that is more like hubris from the marketing department.
At any rate, you should be building and executing your marketing strategy at the same time you are developing your business strategy as well as present narrative to investors and possible users in the beginning.
Key Elements of an ICO Marketing Strategy
Keep the above points in mind as we discuss the key elements of any ICO marketing strategy. Different marketing teams and firms will coordinate their efforts in different ways depending upon their product, investor base, and intentions. But the building blocks we cover below are important in almost every ICO.
Clear and Concise Narrative
We talk about this more than anything because it is absolutely crucial. You need to define a clear narrative from the very beginning. You should be able to tell your investors what your company does, how your team came up with the idea, why the idea is valid, and why your project has the best team to execute the strategy.
Know who you are marketing to, what they expect, when they expect it, and what their motivations are.
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“Key Elements of an ICO Marketing Strategy
§2
Social Media Marketing (SMM)
There is a reason why Facebook, Twitter and Google have become such powerful advertising machines in recent years. Social Media enjoys almost unprecedented (except for Live Sports) engagement and marketing metrics.
While all of the top social media companies have pretty much blanket-banned advertising of ICOs, except within extremely strict parameters (check for your ICO as these are extremely compelling platforms), ensure your project is visible and coordinated across all of the available platforms.
A Medium blog, Reddit and many other country and industry specific social media networks give you the greatest opportunity to communicate directly with your potential investors. Your social media marketing strategy should be supported by all of the other elements of your business, your website, your press, your team’s interviews, etc.
Did you know?
Encouraging user engagement has been a good marketing strategy
that has played out well, despite bans in paid advertising
on many social media platforms.
Encouraging your users to “retweet” or “like” posts and pages helps drive momentum and awareness significantly.
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” Key Elements of an ICO Marketing Strategy
§3
Bitcointalk and Forums
Don’t let the name fool you, Bitcointalk.com is about more than just Bitcoin. Indeed, it is the largest forum on the web for the discussion of cryptocurrencies.
It has become tradition to announce new ICOs on what are known as ANN’s or Announcement Threads. This provides readers with basic information on the company, the token sale, dates on the timeline, etc.
The forums provide a tremendous outlet for open and constructive discussions with your investors and the broader community. This kind of positive communication further demonstrates your company’s legitimacy and allows investors to see the idea stands up to scrutiny, and your team does not shy away from pressure.
Employ an Experienced Bounty Manager
The Bounty Manager is the person responsible for coordinating bounty hunters. The Bounty Manager will also check the quality of the bounty hunters’ work and attribute tokens for the work they have done. Bounty hunters should be thought of as marketing elements, as well as sales or investor relations elements too.
A word of caution…
It’s imperative this person chosen for Bounty Manager has a lot of experience.
Many bounty hunters try to exploit an inexperienced Manager and get rewarded for useless work, work that does little to promote the project to legitimate investors.
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“Key Elements of an ICO Marketing Strategy
§4
Operate and Control your Online Community
By now you are aware that Telegram is the communication application of choice in the cryptocurrency space. It is fundamental for every ICO that you operate your own channel on Telegram.
Ideally the discussion should be positive and constructive. It should be focused specifically on your company, but also driven by whatever means or factors are likely to help inform and support your company in the eyes of your investors.
Good things to do in your Telegram channel include:
Promote your company’s new ideas and developments.
Highlight how your company is different from the competition.
Maintain a constructive dialogue with the community.
Allow domain specialists on your team to answer specific questions from your channel members.
You and your team will earn confidence from members of the community if you show your own sincerity in your dealings with them. The better answers your team provides, the better your chances of success with your overall campaign.
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“Key Elements of an ICO Marketing Strategy
§6
Broadcast your company’s Security Work
One particular issue is of paramount importance and everyone knows about it from the news too. You absolutely need to protect yourself and your investors from hackers. Security is on everyone’s mind, and you should frequently remind your investors that security is on the top of your mind too!
You should write frequent posts about engaging professional auditing firms to check your smart contracts before they go live, your compliance with KYC, and the stringent checks and balances employed by your project to defeat hackers. All those things help to not only remain secure, but also to demonstrate your sincerity to your investors. You will be building even more credibility for the project.
This is not difficult to do. But you would be surprised how many projects just don’t care! They do not take any of the necessary and available security steps to secure their investors’ funds and business. They have nothing like this to show their investors.
We strongly recommend you market the good work your team is doing, your sincerity and your concern, because it will play out well and reward you with benefits on every level imaginable. This is like why your bank will frequently tell you how much work they are doing to keep your money safe. You feel good when they convince you how hard they are working for you.
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“Key Elements of an ICO Marketing Strategy
§7
Announce your ICO to ICO Tracking Websites
Since an ICO is always a planned event, it is crucial to announce it well in advance.
The announcement should be placed on popular ICO calendars, such as ICO Drops, ICO Bench and others like that. Savvy investors regularly scour these websites looking for newly listed high-quality projects. You can also use the ratings they give you in your own promotional material.
The links generated by ICO listings are also necessary in your link-building strategy. This is a specialized and technical component of marketing strategies that we will cover in more detail in the advanced modules. It is an incredibly effective way to validate the authenticity of your ICO campaign and make your project appear higher in search engine rankings.
Target a Better ICO Rating
Once your project is listed on ICO tracking websites, you should pay close attention because the ratings they give you are not static, your rating can change.
The initial ratings are usually preliminary, based on the information provided to the tracking website by the project. If, for example, you get a low score because your team is not clearly established, then take care of that issue and go back to update the information as soon as you can.
If you can get high ratings on ICO tracking websites, this is a proven and effective way to attract investors to your project.
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“Key Elements of an ICO Marketing Strategy
§9
Feel Comfortable using Outside help
There are specialized agencies that can help market your ICO to potential investors. They are able to execute targeted and specialized marketing strategies to reach certain difficult-to-reach investors, or to convey a particularly complicated message. These agencies are part of the rapidly changing landscape for start-up blockchain businesses.
Often, they will have connections with fund managers, big investors, and community influencers too.
-They will guide you throughout the entire process and should only stop work after the successful completion of their task or after the ICO. It is worthwhile to employ them for a particular specialized service. You are the one in charge of marketing overall. And for most ICOs you need to do a lot of the routine work yourself. The ability to recognize when to bring in a specialist will dramatically improve the overall performance of your ICO marketing campaign.
-They will analyze the markets, study competitors and establish a personal campaign method that is best-suited for your company. They are able to do a range of things for you. Take advantage of their highest-level expertise, use the greatest value-added knowledge and abilities they have to offer. But this kind of expertise can be expensive, so try to use them in a targeted and prudent manner.
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“Sales & Accounting of an ICO
The ultimate purpose of an ICO is to raise capital via the sale of a product, in this case utility tokens. Now that you know how to market an ICO, the next thing to learn about is how to actually sell the tokens. In other words, now it is time for investors to buy the tokens you have been advertising.
In this part of the lesson we study the project from the perspective of the ICO Sales Lead. You will also see how to effectively account for funds involved in the ICO project.
The primary role of all team members, and the sales function in particular, is making good investor relations and “selling” the tokens to investors.
Predominantly, there are two major ways of selling your tokens:
Presale ICO
Public ICO
Presale ICO
This is also called “pre-ICO”, it is the private sale of tokens to selected investors (maybe family or friends) before the main crowdfunding goes live for the public.
Private presale is typically something done by the founders and/or their advisers when they pitch projects to crypto funds, VCs and angel investors. A sizeable amount of money can be raised, which can then be used to fund your pre-ICO marketing campaign.
Sometimes the pre-ICO stage is a way for projects without an all-star team or influential network connections to raise funds and be able to reinvest into a strong marketing campaign.
Disadvantages of an ICO Presale
One unfortunate disadvantage of ICO pre-sales however is that early investors or adopters tend to dump tokens as soon as they become tradeable on an exchange.
They are often happy to sell tokens at the ICO listed price because they bought the tokens for less than the price of the main ICO. They make good profit on their investment, but the value of the token faces downward pressure in the market. But even this is not all bad, an ICO project does in fact need people to sell a certain amount of volume into the market to make a liquid market for that token.
Public ICO
A Public ICO is simply the token sale that is announced and available to the public. This is when the ICO “goes live”. Usually, there is a percentage of total tokens to release to the public. Those are the tokens for investors to trade during the Public ICO.
This is the single most sensitive time from the perspective of the Sales function. This is when you need to bring your investors, your team, and all of your hard work together to support the ICO. The success you enjoy at this point can lead to long term business success for the life of your project.
In the advanced modules you will study a few more details essential to a thorough understanding of the entire process.
Accounting for an ICO Company
It is true that the purpose of any business venture is to make money, to make a profit. But the money raised from ICO pre-sales and public sales is not profit, it is money meant to fund the project.
In most cases, if profit comes, it comes much later.
With this in mind, if you are sitting on a substantial amount of money raised, it is generally a good idea to diversify. Take around two thirds of the original cryptocurrency you raised and put that money into ETFs or indices that give you diversification and stability of value.
The funds you raised in the ICO are vital to your operations. A crypto flash crash could cost you everything. You also need sufficient fiat and cryptocurrency liquidity to pay salaries and expenses.
We will go into much more detail about the Accounting function in the advanced module.
Management of an ICO
For an ICO campaign to be successful, it needs careful and disciplined management.
Everything needs to be managed effectively, from the planning, to the team, to the marketing, funding, and token sales.
Key Management Elements of a Successful ICO
-Build a Strong Team
A team should always be built from your original vision and grounded in your technical requirements. Build a team that works well together and feels comfortable in the business culture you have created for your project. Your team members do not need to be best friends. Nor do they need to be the absolute best in their respective fields. What they do need however is the ability to work together to solve problems and produce amazing quality work.
-Hire the Specialists you need
It is most likely your start-up ICO company will be low on funds and big on dreams, just like most other new business ventures. You need to make sure you spend your money wisely, only where it adds definite value to the project.
-Spend money where you need to, but focus on value and prudence.
-Manage your Community as your first priority
We’ve said it before, we’ll say it again, your community and investors are not just silent partners, for an ICO company, they are your early adopters. The Management role, at least as much as any other role on the team, should always have one eye on the Telegram channel.
Make yourself and your team available to respond to questions in a timely and respectful manner regardless of the tone or intention behind the question. Your investors are everything, treat them with the respect they deserve.
Notable External ICO Consultants
Finally, we mention the following companies as an example, just so you have some practical points of reference in this area. Regardless of which department you are in, or even thinking about the entire project, these consultants offer services that can be of great value for your project.
Crowdcreate
The digital marketers at Crowdcreate are specialists in crowdfunding and have effectively supported more than 35+ undertakings. Crowdcreate is a full-benefit development office with a demonstrated reputation. They have already raised over $35 million.
Crynet
Crynet has a wide range of coverage over three continents. Crynet offers support services for ICOs and Blockchain Driven Business. They include Multinational Legal Support, Blockchain Development, Blockchain Technical Support, Payment Gateway crypto-cash, Blockchain HR, Advisor Support, and SMM across all platforms.
Anchor Point Marketing
This company will make sure your project gets the attention it deserves. Additionally, with regards to ICO PR and advertising, Anchor Point Marketing offers an end-to-end solution from the beginning of an ICO company until after an ICO. They are comfortable enough to jump in and help whenever you need them to.
Get useful tips about promoting, marketing and eventually managing an ICO after reading the full lesson of our Intermediate Course!
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