Money is going digital.
In 2013, you could count the number of active cryptocurrency coins on both hands.
Today, there are 8,832 active coins and tokens, according to CoinMarketCap.
Launching a successful Initial Coin Offering (ICO) continues to be the main mechanism for bringing these digital assets to the marketplace. In cryptocurrency, an ICO is a crowdsourcing way to raise money for a new coin or application. Investors purchase tokens related to a product or service that are expected to increase in value based on demand. However, in many cases, several types of cryptocurrency may offer some form of utility, but they don’t always offer an ownership share in the organization or a portion of revenue, which is a key difference between ICOs and initial public offerings (IPOs) for stock equities.
The timing of the offerings is another important difference. For ICOs, they occur in the beginning when a coin is publicly launched. For IPOs, they tend to happen once the company is established and looking to expand by diluting ownership.
Since 2019, $19 billion has been raised through ICOs, while only $969 million has been raised through equity crowdfunding, according to research from CB Insights. The inclusive nature of the offerings has made them popular worldwide. For example, anyone with a digital wallet can participate in an ICO and the market is open around the clock in every time zone, which has made it easier to build large investor followings.
To increase the odds of launching a successful ICO, your coin will need to be set up for success. Here is a checklist of essential items:
Cryptocurrency Attorney Insight #1: Legal Assistance
The first must-have is legal advice from a trusted lawyer with crypto and blockchain experience.
As a member of the Connecticut Crypto Forum, which Pastore LLC has sponsored since last May, we have helped cryptocurrency and blockchain startups succeed, while others have struggled because they were not savvy about regulation.
Your attorney will need to assess whether your ICO is promoting coins that are deemed securities by the SEC. Market professionals may be promoting the sale of coins without determining if securities law is applicable to the digital assets, which could result in a violation of the Securities Exchange of 1934.
The Howey test will help you understand the legal nature of crypto at your ICO.
In 1946, the U.S. Securities and Exchange Commission (SEC) v. W.J. Howey Co. created the basis for specific factors that separate a security from a commodity. In the decision, which involved citrus grove buyers, the investors only needed to supply capital to the arrangement, while all the other details were managed by others. This point underscores the basic tenets of an investment contract. The four factors include 1) an investment, 2) a common enterprise, 3) a profit expectation and 4) generated from the work of third-party participants.
Cryptocurrency Attorney Insight #2: Marketing Expertise
A whitepaper is a crucial document that spells out a looming problem and positions the coin as the solution. Biographies are also important. In the beginning, startups are only ideas, while the team members are the product that investors want to support.
The blockchain architecture should be disclosed and key topics, including energy consumption, interoperability and scalability, should be addressed for investors. The tokenomics of the coin, which includes supply and demand issues, should also be included in the document. What is the total supply? The current supply? Will coins be “burned” or permanently removed from circulation? These questions should be addressed.
The whitepaper should include a roadmap, which includes important dates and milestones, in addition to the amount of money raised and its intended use.
Web company Dev Technosys estimates that cryptocurrency companies should budget 10% to 20% of their funding target to support its marketing program.
As part of the outreach program, a website is an important part of the puzzle. It’s the center of your brand’s online universe. Cryptocurrency organizations tend to opt for a clean, simple one-page site that scrolls down to company news, industry awards and affiliations, as well as the roadmap and background of team members.
Cryptocurrency Attorney Insight #3: Technical Experience
There are several technical aspects a cryptocurrency team must consider to improve its chances of a successful ICO.
First, a security audit for your soon-to-be launched crypto coins leverages code analysis that discovers problems in the applications. This exercise needs to be part of your pre-launch process and stated in the marketing materials to build confidence among investors.
An emphasis on blockchain development, however, cannot be understated. Development is about maintaining the platform by managing various usages such as distributed applications, smart contracts and digital currencies. As a reference point, Ethereum may have the highest number of developers with 5,758. Since Bitcoin was established in 2009, it is estimated that there are more than 23,000 developers in the field today.
And the most crucial, make-or-break, technical endeavor? Getting your coin on an exchange. The exchange listing creates many “abilities” for cryptocurrency coins, ranging from credibility, visibility and accessibility for investors. Of course, price stability is one of the biggest benefits.
Bottom line, considering any potential legal ramifications of your cryptocurrency coins first and foremost will create an environment for a successful ICO—and productive venture.
(Joseph M. Pastore III is chairman of Pastore, a law firm that helps corporate and financial services clients find creative solutions to complex legal challenges. He can be reached at 203.658.8455 or firstname.lastname@example.org.)
Tags: cryptocurrency, Joseph Pastore
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