There is definitely another side to the coin: choosing security token to launch the project and launching an ICO in close contact with lawyers from the SEC can facilitate the project’s future existence, provide legal security, and thus a lower risk, this will certainly help secure users and ensure a more stable growth. Also, projects that choose this path today will have certain advantages. Issue of tokens in accordance with Regulation D, Regulation S, Regulation A+, and Regulation Crowdfunding documents will cost the company cheaper than launching a public token on its own risk.
Work in the context of the SEC will protect the company from further inspections and litigation with the regulator, which are unavoidable if you issue unregistered securities. If a startup decides to issue tokens that later may be considered securities, there’s a very high risk of potential future liability. That’s why experts usually advice to avoid working with US market in this case, as issuing unregistered securities is a violation of Section 5 of the Securities Act of 1933 and will result in high fines along with up to five years in prison.
At the moment, the SEC is limited in resources and obviously will not be able to initiate litigation for all projects that raise issues, but for such projects the main risk is private investors, as they can sue you using Section 12(a)(1) of the Securities Act and claim damages or cancellation of sales, and also appeal to Rule 10b-5 of the Securities Act.
In addition, companies that do not register a security and do not go through all the official procedures (or claim that they are not security) must carefully study “Blue Sky” laws when planning an investment company. A blue sky law is a state law in the United States that regulates the offering and sale of securities to protect the public from fraud. Though the specific provisions of these laws vary among states, they all require the registration of all securities offerings and sales, as well as of stockbrokers and brokerage firms.
When passing formal procedures, a start-up can count on exemptions from the SEC like Rule 506(c), 506(b), and Regulation Crowdfunding, and the laws of individual states will not influence the development of the company.
Will these measures help?
In fact, the only reason for the seeming brutality of the SEC, which puts spokes in wheel of progressive companies from the world of blockchain is an attempt to protect US investors from fraudulent schemes. All requirements for information disclosure and company registration are designed to make the rights of buyers transparent and to clarify their expectations. Such measures as restrictions on the sale of tokens to non-accredited investors in certain cases will help protect those customers who cannot afford investments with a high risk of losing funds.
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