How to Structure Your Token Sale (ICO) to Allow All U.S. Investors to Invest
Token sales or initial coin offerings (“ICOs”) were once regarded as a way to make investment opportunities available to mainstreet investors and to distribute wealth to them. By selling blockchain tokens, token issuers sought not only to raise money for their blockchain projects, but also to build a community. For a brief time, it was rumored that sales of “utility tokens” are not regulated by the SEC or that the SEC would only target issuers that were attempting to defraud investors. However, this is incorrect.
If You’re Selling a Security to a U.S. Investor, You Must Comply with U.S. Securities Laws
The SEC regulates all offers and sales of securities in the U.S. Within a year of the ICO boom, the SEC began speaking out on ICOs and taking enforcement actions against token sales, including one company that sold utility tokens and did not appear to engage in any fraudulent activity.
The SEC was clear that whether you are selling a security is based on the facts and circumstances surrounding the sale, and if a security is sold to a U.S. investor, the U.S. securities laws apply.
This caused some blockchain projects to avoid mainstream U.S. investors, selling to accredited investors and foreign investors instead. However, if your goal is to build a community in the U.S. and provide your community with an opportunity to purchase tokens as an investment, you can do that.
Using Regulation Crowdfunding, You Can Raise Money from All U.S. Investors, Regardless of Their Accreditation Status
Regulation Crowdfunding is one way you can provide mainstreet U.S. investors — that is, unaccredited U.S. investors — with an opportunity to invest in your tokens in compliance with U.S. securities laws, while building a community of supporters.
Under Regulation Crowdfunding, you can raise up to $1.07 million for your company every 12 months.
A Case Study in Using Regulation Crowdfunding to Sell Tokens as an Investment to Mainstreet Investors
The 12-year-old CEO of Quarters is using the Regulation Crowdfunding exemption in order to raise funding for Quarters from the community. Under the Quarters Regulation Crowdfunding Offering, investors purchase a debt instrument, which Quarters will pay off in cash or in tokens. If Quarters pays investors in tokens, the investors will receive Q2 tokens, the same type of tokens sold to accredited investors in a private presale.
Q2 tokens are a security. They entitle holders to receive dividends in the form of Ether whenever Quarters tokens are sold.
Quarters tokens are not a security — buyers cannot resell the tokens and can only use them to play video games across various platforms that support Quarters tokens.
However, customers of Quarters tokens that also buy Q2 tokens, can earn dividends every time they or anyone else buys Quarters tokens. This creates an incentive for Quarters customers to continue participating in the Quarters ecosystem and to encourage their friends and family to do the same.
You Can Create a Crowd of Loyal Customers and Supporters Using Regulation Crowdfunding to Raise Money for Your Company
The idea behind Regulation Crowdfunding was to create opportunity for companies to engage their customers and for mainstreet investors to be given investment opportunities previously only available to accredited investors. By allowing customers to invest in the companies they love, the idea was that they would recommend the company to their friends and family, helping the company build a network of loyal customers.
Token sales were based on a similar idea of raising money from the crowd and building a community of customers that would not only purchase products from the company they invest in, but also make a profit.
Regulation Crowdfunding allows blockchain companies to engage in token sales in compliance with securities laws and to raise money from all U.S. investors, regardless of economic background. Quarters is doing this with their Regulation Crowdfunding offering and you can too.
This article is also published on Medium.
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