If the SEC thinks even utility tokens will be classified as securities, then the rules surrounding the thousands of ICO advisory services (especially those not licensed as investment bankers) are likely to change drastically — and change soon.
Take some time to peruse Linkedin profiles in search of how many “ICO Advisors” and “Blockchain Experts” have arisen in the last six months. The numbers will astound you. As of this writing, there are some 7,641 individuals who are tied to ICOs. While the ecosystem here is expanding rapidly, there are several issues inherent with many would-be advisors to coin and token offerings.
First, most are not registered to sell securities or advise on securities transactions. Given recent moves by the SEC, the writing on the wall is clear–regulation is coming. The good news is that it is likely not to look much different in structure and rules than the current regulation. The bad news is that it is likely no to look much different in structure and rules than the current regulation. It will likely look more similar to current exemption laws, which many of the more recent ICOs have already been attempting to following.
The current laws will include restrictions on issuers, investors and the advisors to the deals in at least some of the following ways:
- Marketing. Over-hyped and unsubstantiated promises made by coin and token issuers will be had in mass scrutiny. General solicitation is also likely to be regulated by current rules, which means states can and will have jurisdiction in some instances and that exempt notice filings may need to occur in certain jurisdictions.
- Investors. Not everyone will be able to invest in every deal. Period. Unless issuers wish to go through exemptions (which themselves can be costly), investors may be unwittingly locked-out from participating in some very compelling deals.
- Commissions. Unregistered advisors and finders may find themselves seeking other means for compensation in assisting issuers with a transaction. However, given most deals are would-be startups with nothing more than vaporware, it may be difficult to exact large up-front fees. Bounties, advisor kickbacks and other forms of promotional compensation that fall under the definition of what would be considered a “broker.”
- Selling Restrictions. While good for token velocity, selling restrictions are likely to remove the pump-and-dump fervor that naturally comes from pre-sale discounts and unnatural upward price moves through an offering, which allows investors to profit immediately. In other words, Rule 144 –which has been around much longer than token offerings–is likely to be implemented in most transactions involving both utility and security tokens.
Many coin and token offerings are not structured properly enough to protect investors in the long term. This is one of the reasons I argue that we should just assume these products are securities from the outset AND offer equity in an initial coin offering. In addition, investor protection requires regulation. Regulation requires oversight. Oversight means licensing of advisors and those assisting throughout the process. There will be legitimate ICOs heading into the future. In fact, I think many of the best ICOs are yet to come. However, as the process becomes more legitimized so will the advisors to the deals, which in this case means licensed investment bankers.
What do you think? Is there a world where ICO advisors are not registered? If so, how will it work?
