FACTS: a new model for the legal ICO

Several blockchain companies recently advertised "legitimate" or "compliant" American regulators ICO. However, getting deeper into details, it quickly becomes clear that these ICO-teams do not understand the SEC's requirements and that their location of the tokens does not comply with the standards. This is not surprising. Most entrepreneurs (quite rightly) are more focused on building a business than on understanding regulation, and it's not just about businessmen in the blockchain industry. Nevertheless, companies that raise funds through the ICO are very at risk, and today entrepreneurs need to understand the regulatory requirements in order to avoid problems.

Any ICO in the US must meet three requirements: 1) SEC rules, 2) maintain the convenience of using the primary token and 3) improve the conditions currently offered to investors. If you collect all these requirements together, you can suggest a strategic model for the ICO called FACTS (Fair and Compliant Token Sale - Fair and Legal Placement of Tokens).

Introduction

First of all, it should be noted that creating such a strategy is a very difficult matter, and that's why. Most ICOs to date have acted in accordance with the assumption that the tool they offer is an "utility token" to which the SEC rules will not be applied, and not a security.
However, there are some conditions that a token must meet in order to be considered "practical", and which most companies do not comply with:
The product is running and can be used. Most companies do not have a usable version of the product for token holders at the time of the ICO. It is difficult to assert that the token currently has practical application if it can not be used for several months or more.
Tokens are purchased by platform users. Most ICO tokens are bought by investors looking for profit, rather than users of the base platform. The ICOs also appear to be mostly capital expansion activities, which should probably fall under the jurisdiction of the SEC.
Many will agree that there are many vulnerabilities in the concept of "practical token", and when you begin to assess the risks associated with this approach, some crypto-currency entrepreneurs think about other options, assessing them as more appropriate to the requirements. Unfortunately, everything does not become easier or clearer if you study SEC rules for working solutions.
Let's consider the idea of ​​a "token-share" proposal that will meet the requirements of the securities laws.
If you refer to the source, "According to the Securities Act of 1933, any offer for the sale of securities must either be registered with the SEC, or correspond to the notion of exclusion. D (or Reg D) contains three rules that exempt registration requirements, allowing some companies to offer and sell their securities without having to register securities with the SEC. "

Unusable tokens

Let's start by tossing out the option of registering tokens with the SEC, as that would imply that a token is listed on a stock exchange, held in cold storage and no longer transferrable in the peer-to-peer realm.

This option also assumes that a company can even get its token listed on a public stock exchange in the first place. In short, registration with the SEC is not a viable route.

If a security token will not be registered, then it must qualify for an exemption. Most private token sales would fall under Rule 506(c) of Regulation D, which would restrict token sales to verified accredited investors and add transfer restrictions. Most ICOs today are already self-restricted to accredited investors, and when they are done alongside a Reg D filing, many people would suggest they have executed a "compliant" ICO.

Unfortunately, Reg D offerings come with additional baggage.

After the offering, a Reg D security token would have to comply with ongoing restrictions, including a 12-month lockup and a limitation on token transfers solely to other verified accredited investors, which would need to be monitored.

One may ask: How exactly is a token to be used in commerce when it can only be accessed by accredited investors? Should the use of decentralized software be limited to the wealthy? Reg D restrictions cause a token to become totally inaccessible by most people, and frankly, unusable in general.

We now find ourselves in a situation where we must choose between either creating a non-compliant utility token that is likely subject to securities laws, or a useless security token that doesn’t work in commerce.

The FACTS ICO model is a solution to this conundrum.

The FACTS approach

FACTS is a two-token ICO model that supports both crypto entrepreneurs and SEC regulators with a model that fits into current laws every step of the process.

The model utilizes two tokens: a security token and a utility token, each created within a two-part token sale, outlined below.

Part 1: A company creates a security token, which is offered to the public through an ICO. The ICO is filed with the SEC under Reg D and is restricted to verified accredited investors, who will all have a 12-month lockup period on their security tokens, which can only be transferred to other accredited investors afterwards.

This security token would give investors equity in the company (a cumulative 10% of the company in the form of non-voting stock might be a good industry standard), and it fundamentally gives investors a better deal in the ICO.

You may be asking how a security token solves any of the problems I mentioned before. Now for Part 2…

Part 2: Once the ICO is finished, the company then makes a distribution of utility tokens to its ICO investors in the form of a dividend, more specifically, a property dividend. The total value of utility tokens distributed to investors will match their investment amounts in the ICO (i.e. investors should receive the same number of utility tokens that they would receive in a typical ICO).

These utility tokens are not a security, and can be transferred or used by token holders at their discretion. While only accredited investors can participate in the ICO itself (which is arguably an investment subject to securities laws anyway), Part 2 of the FACTS method democratizes the use of utility tokens permanently thereafter.

Through the FACTS model, ICO investors receive two tokens for the price of one.

Furthermore, because utility tokens are distributed to investors in the form of a dividend, the FACTS model offers a clean series of transactions that fits within the existing legal framework.

Some final notes

After exploring many other structures and strategies for ICOs, FACTS is the only model today that can logically allow ICOs to become a more mainstream financing method.

Going forward, this model would benefit from affirmative guidance from the SEC, as well as further research on how it would apply in other countries with their respective securities laws. It would also be worth exploring whether Regulation Crowdfunding can be applied to the model to democratize investment into the ICO itself.