Alternative methods of raising capital are gaining increased acceptance in the mainstream investment scene. This development has opened up new fundraising opportunities for startups, including Initial Coin Offerings (ICOs), or token sales. This article will discuss issues related to the need, or lack thereof, for investors to have ICO accredited investor status when investing in these kinds of opportunities.
Fundraising through offering cryptocurrency investments is an appealing option for many startups. However, ICOs bring with them some important legal considerations, for example: is it necessary for all investors to be accredited when they are investing in an ICO?
Accredited Investors Can Handle Potential Losses
The SEC defines an accredited investor as an individual who is able to protect him- or herself against the potential failure of an investment more effectively than the average investor. These investors must meet certain standards of income, net worth, or sophistication in order to qualify.
If an offering is only made available to accredited investors, the SEC relaxes some of the regulations that often govern the sale of securities. Therefore, if an ICO is considered a securities offering, in most cases they are, the difference between accredited and non-accredited investors is no minor issue.
Utility or Security Tokens
Regarding the ICO accredited investor issue, if coins involved in these investments are considered utility tokens, they may not be considered securities. As a result, they would not fall under SEC regulation. Furthermore, no requirement is present requiring investors to be accredited for utility token offerings.
This rarely occurs in practice. It is only when tokens constitute an integral, operating element of your product that they are considered a utility token. Tokens are considered a security in all other cases and are subject to regulation by the SEC.
SEC Regulation of Cryptocurrency Investments
The SEC requires registration for all securities offerings, which means that virtually all ICOs fall under this category. An issuer may issue tokens to accredited or non-accredited investors if they register their ICO with the SEC.
The process of securities registration can be lengthy, complex, and costly. Due to these challenges, companies often issue their securities under one of the exemptions offered by the SEC. Most commonly, Rule 506(c), Reg A+, and Reg S are used. Less commonly, Ref CF is used.
The easiest exemption to use is Rule 506(c). If investing in an ICO under this exemption, investors must have the status of ICO accredited investor.
Therefore, in order for an issuer to use the simpler process of Rule 506(c) for their ICO investment opportunity, they will need to issue coins only to accredited investors and subsequently take reasonable steps to prove that all of them meet the status of accredited investor. Otherwise, they will need to use a more complicated exemption to offer tokens to non-accredited investors, or register their coins with the SEC.
