Blockchain & Cryptocurrency
Structure Law Group, LLP offers legal counsel to emerging Texas blockchain and cryptocurrency companies and engineers. With locations in Los Angeles, Silicon Valley, and Austin, TX, we are uniquely situated to handle corporate and business matters in the tech sector.
While blockchain was once the Wild West of economics, it has taken on renewed purpose in the years after Bitcoin. Now, Bitcoin and other cryptocurrencies have become major investment vehicles with fractional trading on commodities not far down the horizon. Because this revolutionary technology can meet most of the needs of real currency, many are investing in cryptocurrencies or developing cryptocurrencies of their own. There are many unique issues facing cryptocurrency companies and other blockchain commodities which Austin cryptocurrency attorneys at Structure Law Group, LLP can help you face.ICO Tokens for Start-Up Companies in Austin, TX
While Bitcoin is the most visible blockchain technology, it is becoming increasingly common for companies to raise funds using initial coin offerings (ICOs). This form of revenue generation is quite disruptive. It allows nearly anyone to purchase ICOs for investment purposes. Regulations and legal ethics are still struggling to catch up with this disruptive technology.
Startups need to ensure that their ICOs are compliant with SEC regulations, state laws, including The Commodity Futures Trading Commission (CFTC), FINRA, and more. Austin crypto lawyers at Structure Law Group, LLP can provide the legal backbone for your Texas startup’s ICO. By complying with necessary regulations, you can avoid costly lawsuits related to legal gray areas where the law has yet to catch up with reality.Types of ICO Tokens
From a legal perspective there are two types of ICO tokens, and the distinction is extremely important. Security tokens are under the regulation of the SEC, while utility tokens are not. If a token is misclassified as a utility token, it can avoid SEC regulations while ostensibly gaining some of the advantages of that classification. However, it is illegal, can result in protracted litigation, and often results in serious fines and penalties for the company.
A security token is a fractional representation of a company asset. In other words, you own part of the company when you purchase a security token. Utility tokens offer some benefits like the ability to buy in at a later time at a decreased rate, but do not offer company assets. A security token can be compared to what we know as typical common stock in a company, which are per se securities. This is why security tokens land under the eyes of the SEC regulations. In the alternative, utility tokens do not offer company ownership, they are generally used only for fundraising, and commonly are used as currency within the company.
Misclassifying a security token as a utility token can land you in hot water with the SEC and your investors.Understanding the Howey Test for Austin Startups
Determining whether or not a token is a security token or a utility token requires a legal test known as the Howey Test. This test has been around for a long time in securities analysis but have more recently been used to identify token forms because some companies offered utility tokens that were actually securities so that they could avoid SEC regulations. It didn’t work. The SEC caught up with them, and many of these companies faced serious liability for defrauding investors. The value of the tokens issued also ended up depressed by investor lawsuits.
The Howey Test differentiates a security token from a utility token in the following three-factor test:
- The token represents a financial investment
- The investment is made in a share venture
- The investor expects or was told they would earn a profit
Obviously, the last factor is the most important. With a securities token, there is an expectation of profit much like purchasing a stock. If the token fails the Howey Test, it is automatically classified as a utility token. Utility tokens are generally offered for site-related benefits such as products or services. They do not operate as money per se, but more like Disney Bucks. When properly issued, they avoid SEC regulations.Blockchain and Cryptocurrency White Papers in Austin, TX
Whitepapers in the cryptocurrency world offer the same guarantees that whitepapers elsewhere offer. They are a prospectus to investors and offer security and transparency. At worst, a poorly-drafted whitepaper can result in investor lawsuits. At best, investors will avoid investing in companies with poorly-drafted white papers.
Whitepapers should include tokenomics, technical milestones, how investor funds are being used, and the disclosure of risk factors. An experienced Austin crypto attorney can assist in the development of whitepapers. An Austin blockchain attorney can also help review the final product to ensure that your tokens are in compliance with all state and federal regulations.Issues Related to ICO Platforms
Blockchain operates on a distributed ledger technology that records the transfer of commodity tokens from one party to another. The technology was later developed to allow companies to raise money, keep tabs on their transfers, and provide investors with someone they could use on their ICO platform.
When startups issue tokens, they must be aware that there is a vast regulatory architecture for handling investor issues. When issuing tokens, companies must be conscious of these rules to avoid class-action lawsuits related to shareholder misgivings.
- KYC and AML problems - Companies are being increasingly asked to police their customers to avoid money laundering and other issues. Companies are responsible for “knowing their customer” and properly vetting them prior to purchase. Structure Law Group, LLP can help your Austin startup draft a useful KYC and AML policy.
Structure Law Group, LLP has locations in Silicon Valley, Los Angeles, and Austin, TX. We can provide all the legal representation a new tech startup needs including ICOs for fundraising purposes. Call our Texas business attorneys today at (512) 881-7500 to schedule an appointment and we can discuss your goals and needs for your ICO and ensure that you are meeting all regulatory requirements of the SEC.