Startup fundraising, in the traditional VC methodology, was flipped on its head in 2017 when a boom in ICO creation saw hundreds of companies forming on the Blockchain with its attached digital currency being born in the form of an investable token. However, this crowdfunding platform which exploded at a rapid rate has finally been hauled in by regulators and authorities who have noticed a few worrying trends. Bodies like the SEC have had a closer look at the tokens coming out of ICOs and in most cases declared them securities.
Suddenly, what is essentially an attempt to fundraise is subject to federal laws and the company, which is supposedly trying to create something innovative with the help of Blockchain technology, is expanding vast amounts of energy just trying to be by the books. But, there is a way around this. Not all tokens being developed off the Blockchain need to be of a nature that leads them to being classed as securities. There are a few other types of tokens that can be built off the Blockchain, including utility tokens.
While there are more than just two types of tokens, including equity, work, share-like and asset-backed, it is important to hone in on two types that can be used to define a new token coming through an ICO- the utility and the security token. In understanding the difference between the two, ICOs can choose a direction that can work better for them on a path of least regulation.
Towards the end of July last year, the SEC, on catching up to the ICO craze, dealt a telling blow to ICO regulation going forward. Looking back at the DAO tokens from 2016, the SEC declared that ICO tokens may be securities and subject to federal securities laws.
It was never intended for ICO tokens to be securities, but SEC chairman Jay Clayton noted that every ICO token the SEC has seen so far is considered a security and explained that if a crypto-asset issued by a