In recent months, a variety of companies have considered "initial coin offerings" (ICOs) as a way to generate money for their businesses. Companies considering ICOs should be aware that, depending on the structure of the coins they are offering, an ICO may involve an offering and sale of securities subject to regulation by the Securities and Exchange Commission (SEC) and/or swap contracts subject to regulation by the Commodity Futures Trading Commission (CFTC). An ICO also may subject a company to potential regulation as a money services business, which could mean that the company needs to comply with anti-money laundering, money transmission, and other applicable laws. Importantly, although the coins being issued may be called tokens or referred to in some other way, regardless of what they are called, the following discussion applies.
When do the SEC and/or CFTC have jurisdiction over an ICO and the coins being offered?
The following flow chart provides an overview of when companies are most likely to need to consider SEC and/or CFTC regulatory issues:
If the coin is not subject to SEC or CFTC jurisdiction and the issuer is not a money services business, is there anything the sponsor should worry about?
Typically, the most significant issue is that—unlike cash received from the sale of stock or other financing instruments—any revenue from the sale of coins is taxable as income to the company.
What are the consequences of SEC and/or CFTC jurisdiction?
Companies subject to potential SEC jurisdiction may need to consider:
Companies subject to potential CFTC jurisdiction may need to consider:
When might the sponsor of an ICO become a money services business, and what are the consequences?
Sponsors can become money services businesses by, among other things, dealing in currency or transmitting money. Money services businesses are subject to a wide range of federal and state regulations, including anti-money laundering and "know-your-customer" provisions, privacy laws, licensing requirements, and other regulations. Some sponsors may be able to take advantage of exemptions from these regulations—for example, for money transmitters that facilitate the purchase and sale of goods and services—depending on how an ICO and coin transactions are structured.
For more information about ICOs or any related matter, please contact any member of the fintech regulatory or tax practices at Wilson Sonsini Goodrich & Rosati.
This Wilson Sonsini Alert was prepared by Amy Caiazza.