U.S. Investors Can In Fact Legally Participate In ICOs
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American investors have not enjoyed the regulatory dance of the SEC and other agencies since the latter part of 2017. Will they? Won’t they? Who’s forced to come to prom as a Security, and who gets a Hall Pass?
While most of the rest of the world has been throwing the crypto party of a lifetime, with the ICO as the guest-of-honor, the founders of new tokens at first limited opportunities in the USA to accredited investors: and then the trend became to disavow US citizens altogether.
The anticipation of regulation, some commentators might argue, has been worse for the cryptocurrency market than regulation itself. Nobody knows what the rules really are, or what they’re going to be, so the safest thing to do is assume the worst.
But there is a form of ICO that is legal in the USA – not just for accredited investors, but for anyone who cares to throw ten bucks or more at a potential moonshot. It’s like July 4th last year, all over again.
Securities rules are wrapped in a maze of regulations. For one thing, the law has a very obvious slant in favor of wealthy (‘accredited’) investors: no kids allowed at the grownup table. And from a founder perspective, simply registering a securities offering is an expensive affair, which requires hiring lawyers and third-party auditors and so on ad nauseam.
There are some exemptions to the securities regime, but they’re so complicated that you might find yourself wishing you’d gone the registration route. Figuring out your options is as simple as decoding rule 506(b) of section 4(a)(2), and knowing how it differs from 506(c). (Not financial advice.)
One company, however, is trying to take the headache out of the registration process. Republic, which calls itself “the Amazon of private investing,” has developed an SEC-compliant fundraising model that allows their clients to make worry-free offerings to all clients—of any income level.
Republic (not Republic Protocol, they could hardly be more different) works by allowing its users to tap the SEC exemption for online crowdfunding.
According to the relevant rules, such crowdfunding must be “online through an SEC-registered intermediary, either a broker-dealer or a funding portal permit a company,” and the raised funds cannot exceed $1,070,000 per year. Republic, which is an SEC-licensed funding portal, allows startups to launch a limited coin offering without pouring their seed capital into lawyers’ country club memberships.
Once Republic launches a token sale, there’s no limit on which investors can contribute—although there are limits to how much they can contribute. Investments are issued in “Token DPA’s” — debts payable by assets, Republic’s alternative to SAFTs. Unlike SAFTs, Token DPA’s come with obligations of payment. “It is structured as debt to the project and a loan from participants,” Republic stated in an emailed statement. These tokens can also include escrow provisions, to “guarantee investors funds are used responsibly.”
Of course, you won’t see the letters ‘ICO’ featured prominently on their site, but the general idea – that a member of the public can attempt to identify a strong investment opportunity, and can back it with their own money – is very similar to the ICO model in philosophy. The difference, most clearly-illustrated is thus:
“When you invest on Republic you receive a financial stake in the company in the form of a security.”
Another proviso – that may be a dealbreaker for the get-rich-quick crypto crowd – is that “It is important to understand that as holders of a Token DPA, there are substantial restrictions on resale and trade during the first year of ownership, with few exceptions.”
Republic says that only 5% of applicant projects are accepted after due diligence, and 95% of these reach their fundraising goals. There’s no clear way to verify that figure, but a scroll through of Republic’s website shows 42 companies which met their fundraising goals, and many which exceeded them.
Some of the projects are new takes on existing ideas — there are ridesharing and music and radio apps, but there are also a few very new ideas.
Have you ever wanted “delivery of cannabis through your skin with a cream?” Well, there’s a project for that, and it’s 1571% funded. How about a “decentralized World Bank?” It’s already raised $81,758.
No one likes being told what to do, and the crypto world is not likely to stop griping about stifling government regulations anytime soon. Until then, it’s a good sign that some projects are starting to put on their seatbelts.
And if a loved one ignores that seatbelt sign, and gets themselves locked up for Securities fraud? There’s always Pigeonly. It allows you to search for, and communicate with, your incarcerated partner.