ICO Law and Compliance

Initial Coin Offerings (ICO) represent a powerful new way to raise much-needed funds for your company’s projects. Tech startups all around the globe are now using ICOs to fund projects as a way to avoid incurring debt from bank loans etc.

Digital currency sales allow companies to minimize financial risk and instead focus on getting their ideas off the ground and into operation.

There has already been a multitude of successful ICOs that have helped fund, at least in part, some of the most exciting new startups in the tech world today. The most famous of these are the Ethereum Project, Filecoin, Qash, Stratis, Antshares (now known as NEO), and the popular payment gateway Spectrecoin.

These highly successful digital coin sales managed to raise $100’s of millions of dollars between them, cementing the reputation of ICOs as a great way to gain access to the resources needed to make your project happen.

Part of the process of launching your own ICO is understanding ICO Law. Since ICOs are such a new concept, not only are few companies really familiar with the laws that apply to them, but governments themselves have not had the time to create sufficient laws and frameworks to regulate them either.

In order to help companies get a good idea of the current laws and potential pitfalls to launching their own ICOs, I aim to examine the current initial coin offering regulation in countries like the United States. For the sake of perspective, I will also look at ICO legal regulation in countries such as Singapore and China, as well as Europe, to highlight the need for companies to make sure that they have a good understanding of how ICO laws vary from country to country.

The aim of this article is to demonstrate just how important it is for your company to seek expert counsel to make sure you are fully in the picture as to the legal status of ICOs in whichever country(s) you plan to hold yours.


What is an Initial Coin Offering or ICO?
How to launch an ICO
ICOs and the law
ICO law in the U.S
ICO law in Singapore
ICO law in Europe
ICO law in China
My Final Thoughts

What is an Initial Coin Offering or ICO?


An ICO is a sale of digital tokens for the purpose of raising fiat currency in order for businesses to finance their projects. As I said in my introduction, the reason that ICOs are such a popular fundraising mechanism is that they offer a way for companies to circumnavigate traditional methods of raising funds.

Most of these methods come with strings attached and so carry a high price should the project fail. Bank loans often require companies to show healthy capital income or collateral, assets which can be seized in the event that a company should fail to repay the loan. Venture capitalists will finance projects but will want to take a chunk of the ownership of the company in exchange, which is exactly what happens with an Initial Public Offering (IPO).

The great thing about ICOs is that companies get to set the terms of the deal and don’t need to forfeit any control or stake in the ownership of their company.

In order to attract investors, a company simply needs to create a white paper detailing exactly what their project is all about.  If an investor is interested in helping to fund your project then they can purchase some of the crypto tokens you have offered by paying with bitcoin or other altcoins such as Ether, Ripple, Litecoin, Bitcoin Cash, etc.

Not only do investors get the pleasure of helping get companies’ projects off the ground but they also hope to gain significant returns when a company’s crypto tokens rise in value as more and more people begin to use them. Investors who took part in Ethereums ICO made enormous returns on their initial investment when Ether became the 2nd most valuable cryptocurrency in the world.

How to launch an ICO

Before I take a look in more detail at ICO legal issues, it is worth noting that literally anyone can launch an ICO. All a company really needs is a great idea, an ICO white paper that clearly explains the idea and how to make it a success, and finally a good marketing strategy to get the word out to potential investors. Read this article on how to create an ICO marketing checklist if you would like to know more.

ICOs and the law

It is precisely because anyone can launch their own ICO that they require regulation. Over the past 10 years, the number of scam ICOs has increased dramatically. While ICO investors are getting much more adept at spotting these scams, it still remains a big issue.

These ‘fraudulent’ ICOs that simply aim to raise fast cash, which may or may not be used on the projects they are stated to be funding, have led to ICOs gaining a slightly shady reputation in the finance world. Recently, Jordan Belfort, the less than scrupulous American stockbroker immortalized in the film The Wolf of Wall Street, called ICOs “the biggest scam ever”.

For this reason, governments around the world are beginning to come down hard on ICOs that don’t comply with the existing regulation that applies to them. Added to that, they are also hurriedly enacting new laws to cover ICOs, meaning that every ICO lawyer needs to make sure that they keep abreast of new regulations as they are enacted.

ICOs in the U.S


ICO legal matters in the U.S fall under the jurisdiction of The United States Securities and Exchange Commission (SEC). Their remit doesn’t just cover digital coin offerings made by companies based in the United States, but also whenever ICO tokens are being made available to U.S consumers.

The SEC will apply what is known as the Howey Test to every ICO to determine whether the coins being offered constitute a security asset or something else. Should an ICO fail to meet the standards required by the Howey Test then it will be classified as a stock offering and so must be registered with the Federal Trade Commission (FTC) and adhere to the strict guidelines that this body has in place.

For more on FTC guidelines and the Howey Test, you can visit their website via this link.

It is important to note that at the time of writing the SEC has yet to issue clear guidelines relating to ICOs. This fact makes it extremely difficult for companies to make sure that their ICO will pass the Howey Test by ensuring their token offering qualifies as a tradable security. This is why obtaining the services of a good ICO lawyer is essential for companies based in the USA or those who are offering coins to American investors.

What constitutes a security?

A security is any product that represents an investment opportunity that aims to create a profit by gaining in value. There are lots of different types of securities that include stocks, bonds, funds, rights, to name but a few. All of these securities carry an element of risk, some greater than others, which is reflected in the potential returns that they offer. Securities must also be exchangeable between different parties. Any product that fails to meet these two requirements is not classified as a security.

The reason ICOs occupy a slightly grey area when it comes to being defined as a security, is because there is broad disagreement over whether they are a product that offers a “reasonable expectation of profits”.  Since the purpose of the ICO is aimed at raising funds for a project that is usually not focused on raising the value of the tokens being issued, ICOs are harder to classify as securities when compared to shares, for example.

In the U.S, a company can register with the SEC to allow its ICO to issue securities. Once a company has become an issuer of securities, its ICO will be subject to the US Exchange Act. This prevents that company or individual from buying or selling the ICO tokens unless they are registered as a national securities exchange.

Once a company is SEC-registered, any ICO tokens it offers must comply with anti-money laundering laws and know your customer laws too. Also, the ICO will then be subject to audit by the SEC should it choose to do so.

It is for this reason that any company planning to launch an ICO in the U.S would be well advised to seek expert legal counsel. The penalties for not abiding by these laws are severe and in some cases include prison. The complicated nature of these laws has not only put many companies off holding their own ICOs, but have also meant that many ICOs are unable to offer tokens to investors living in the United States.

ICO law in Singapore


Singapore is not only a global economic powerhouse but also a hub for tech companies who want to issue ICOs. The country has an extremely favorable business climate and has been quick to draw up guidelines on initial coin offerings.

Last November, the Monetary Authority of Singapore (MAS) issued its Guide to Token Offerings to help companies understand whether their ICO needs to be registered with them or not. Should a digital token match the criteria governing products covered by Singapore’s Securities and Futures Act then it will need to be registered with MAS, otherwise companies are breaking the law.

All companies planning to launch an ICO or sell tokens to Singaporean residents must now inform MAS so that they can determine whether or not the tokens can be considered as a security. Companies also need to take steps to determine buyers identities to help prevent fraud etc.

By issuing such guidance, Singapore has made itself the most ICO friendly environment in the world. Since the MAS is able to access each and every ICO before it happens, businesses, as well as consumers, are protected. This increases trust which intern leads to more successful ICOs.

Ico law in Europe


As with the U.S, Europe has strict laws to protect investors and to prevent fraud. That said, like the rest of the world, Europe is still scrambling to pass laws and issue guidance when it comes to ICOs. Today, the EU is far behind Singapore, and a step behind the U.S, when it comes to ICO regulation.  Last November, the European Securities and Market Authority clamped down on ICOs due to the high level of risk that they represent.

The European Union requires any ICOs made by companies or being offered to E.U citizens to fully comply with existing regulation and to adhere to new laws as they are passed. ICOs must now comply with the EU’s anti-money laundering laws and know your customer rules too.

ICO law in China


Despite fueling the surge in the price of bitcoin for years, as of September 2017, China has completely banned for both companies and individuals. This ban does not apply to Hong Kong but is in effect everywhere else in China.

Added to this, the Chinese government has also banned banks from even doing business with any company that has held an ICO in the past. It has said it will investigate any company or individual found to be ignoring these laws and dish out heavy prison sentences for anyone who has. All ICOs held at or around the time of the ban have been instructed to issue immediate refunds to investors.

My Final Thoughts

Without question, ICOs represent a great way for companies to raise capital that they might otherwise not be able to access. As I have demonstrated in this article, it is important that companies understand the laws governing ICOs, not just in the country where their business is based, but also in any country that they intend to issue their tokens as well. Failure to do so risks severe penalties, so making sure that your ICO is compliant with the laws is essential.

For more information about worldwide ICO regulation visit this link.

Aran Davies

Aran Davies

Blockchain Expert | Developer | Writer | Photographer
Aran Davies