Legality & Risks of an ICO Bounty

August 27, 2018by Nate Nead0

If you are reading this, it’s likely you already are aware of what an ICO bounty is and what it entails.

For the under-informed, a bounty on a token or coin offering is simply this: a commission paid to an individual or group of individuals for promoting a coin or token offering.

It’s the unregistered equivalent of a selling agent who is part of an underwriting syndicate in a traditional IPO. Promoters get paid commissions for finding investors to a deal. Social media channels have been the largest

There are several legal and risk issues inherent with a bounty, which I will discuss below. Keep in mind, most of these are discussed through the lens of United States securities laws. This is not legal or investment advice, but likely practically good advice, regardless of where you stand on thing related to ICO bounties.

For Issuers
Blockchain companies looking to utilize a bounty incentive program for promoting their initial coin offering (ICO), should first consider the following:

  • Is the token or coin a security? For risk aversion purposes and based on the stance the SEC has recently taken, it would be healthy to assume the answer is “yes” for the purposes of this discussion.
  • Are you operating your offering under one or more of the requisite securities exemptions (e.g. Reg D, Reg A, Reg S, etc.)?
  • If you are, are the promoters with which you have engaged United States citizens? If so, are they registered under an appropriate Self-Regulatory Organization (SRO) in order to receive a commission for their promotion of a security?
  • Are the promoters foreign citizens? If so, do they reside outside the United States and are they only promoting and/or selling tokens or coins to non-U.S. citizens?
  • Have you performed appropriate background checks, including KYC and AML on all associated promoters and finders to the bounty?

The previous questions are critical for understanding the risks associated with your ICO bounty and paying commissions to those promoting an offering.

Even if an issuer elects to pay a foreign finder to bring foreign investors (not U.S. investors), there is likely little no control over the marketing message–which represents a huge risk in and of itself.

For Promoters
As a promoter or potential promoter, it is critical to ask the following questions:

  • Is the issuer domiciled in the United States? If so, is the company appropriately listing the tokens or coins under one of the aforementioned securities exemptions?
  • Are you a U.S. citizen? If so, are you promoting or selling to United States citizens and receiving a commission therefrom?
  • Are you appropriately registered to receive a commission from the sale of securities?

As a promoter or potential promoter of an ICO bounty, it is important to understand your legal exposure past, present and future. If you are a United States citizen who is promoting and selling tokens for a commission to United States citizens, there is a problem.

While it is technically legal for a unregistered foreign finder to receive a commission from a U.S.-based entity or broker for promoting a security to foreign nationals on a U.S.-based deal, there are other risks to consider, including: foreign securities laws & jurisdictional oversight, promoter background and promoter marketing tactics.

As a U.S. citizen, it is best advised to steer clear of bounties altogether. It represents a web of potential liability that is not worth the potential commission involved. This is one of several reasons to engage an investment banker in your initial coin offering.

Nate Nead

Nate Nead is a licensed investment banker with Four Points Capital Partners, LLC and Principal at Nead, LLC. Nate works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. Four Points Capital Partners, LLC is a member of FINRA and SIPC and registered with the SEC. Nate resides in Seattle, Washington.

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