Daily Fintech Conversations

A self-regulatory code of conduct for ITO (Initial Token Offering) and ICO

Hi @Consultant thanks that is very helpful. Smith & Crown seem to be in a similar space to ICO Rating and that is very valuable. Looking at the ICOs they list, a lot don’t raise any or very little. Which is a good thing. Quality will pay off. Would be interesting to look at best practices of the successful ones (say raised over $1m).

BTW, your contributions would be given more weight if you can show your identity. Its up to you and I understand if you want to remain anonymous, but if you make great contributions (you do) why not get some recognition for that?

I do think that Govt Regs (what we normally call Regulation) can coexist with Self Regulatory Code of Conduct. Some Issuers will choose which to go for and Investors will make decisions based on what they trust. I can totally understand if some investors say “has to be SEC approved or I won’t touch it” but other investors want to look a fundamentals and adhering to a Code of Conduct will be one of those fundamentals and they may decide that they don’t care about Govt Regulatory stamp of approval

Hi @davids Yes, we will want early adopters and our timeframes may be compatible.

I think this is the best way to go. However, regulation of such (at least in the US) would require a new administration, which would require an act of congress and approval by the president. A lot of people are concerned about the probability of successfully creating a new bureaucracy in the modern American political climate, but until that happens, we will have conflicting rules coming from FinCEN, SEC, FTC, CFTC, and OCC. Ironically, the answer to too much bureaucracy in this case may be more bureaucracy.

I would imagine that a digital token or access right is the best new classification. Tokens that act as securities (enabling shareholder voting, ownership rights, distribution rights, etc) probably can rightfully be monitored by securities regulators. What we are hoping for is to avoid securities oversight on AppTokens, since an ITO will never be able to provide the quarterly and annual reporting figures required by the SEC (or others) when a product hasn’t even always been built yet.

As far as self-regulation goes, it seems to me unlikely that the regulators will never regulate. That’s what their job is and they are eager to make sure they do it. The goal of self-regulation (in my mind) is to find a model that works for the industry while protecting investors that regulators can eventually adopt, rather than having the regulators create rules on their own that may be subject to either political biases/pressures or be formed with less than perfect experience/information. Declaring equity tokens (for example, those offered by Overstock or the DAO) as securities and focusing our attention on tokens with little or no functional overlap to those tokens will help in this approach.

This point is purely semantic, but Peter Van Valkenburgh made a point on a Consensus panel the other day about the proper label for this and creating these three letter acronyms that sound like the term “IPO.” His statement was met with large applause at the event, which was:

“It’s like painting a target on yourself. Because, what does an organization like the SEC regulate? They regulate IPOs,” said Van Valkenburgh, referring to initial public offerings. “Why would you adopt the terminology of the regulator when you’re building a thing you hope they don’t regulate?”

I do agree that “coin” is an inaccurate term, but perhaps we can move away from the I_O format altogether? Initial token sale (ITS)? Token Trading Commencement (TTC)? I’m not the best at creating catchy acronyms, but I hope you understand my point on this that if we are re-defining the label, maybe we should move away from securities terminology altogether.

@Jason very helpful. I have been re-reading this great ITO briefing by Balaji S. Srinivasan and Naval Ravikant


It explains better than I can why this is so revolutionary. I like the idea of thinking of tokens as tradable API keys.

I also like the idea of staying clear of equity. The aim is to reward early adopters without resorting to equity i.e. non dilutive rewards. Rewarding early adopter is key. They are the real heroes in the tough journey from MVP to PMF and traditional VC investors are just along for the ride.

One wants to avoid the Oculus Facebook deal where VC funded founders made a fortune and early adopters just got an early product. See this for background: https://bernardlunn.wordpress.com/2014/03/30/oculus-facebook-deal-will-accelerate-equity-crowdfunding-and-change-the-world/

In this scenario, the real value is not in the equity it is in the token. Then I think it is critical that the equity owners are constrained public guardians of the token. The idea of VC funded company controlling a token seems messed up. Founders make money the same way early adopters do, through holding some tokens (which can be “cashed in” at some stage.

Naming is a hard challenge. The world knows ICOs or ITOs. If I had called this a Self Regulatory Code of Conduct for Selling Tradable API Keys probably nobody would have found this forum. Yet I agree that IXO invites comparison with IPO and that puts one in the regulatory cross hairs.

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Kathie Wood, CEO of ArkInvest, raised another valid concern around tokens:
"…expressed concern over whether using one token to buy another token is an in-kind exchange and therefore not taxable, or if it constitutes a taxable event based on capital gains law." in this article

ArkInvest, that I have mentioned in many DailyFintech posts as they have innovated in many different ways, is one of the first active ETFs that has invested in Bitcoin.
“We can’t buy ICO tokens because they’re not financial securities, but I can see [us] in the ICO world, picking and choosing, because some of them are going to hit it big.” said Kathie Wood

_Kathie Wood is calling for SECURITIZATION OF ICOs
"We’d need someone to create a kind of a security backed by the ICOs or a group of ICOs. Then we’d have assurance that it’s passed all of the regulatory requirements that we need it to pass before we can invest in it."

Would you agree that it would be best practice for an ICO today, to block US IPs? That would make sure that there is no solicitation issues.

What about Canada? How is the current regulatory enviroment? Is best practice today, to block Canada IPs for the same reasons as in the US?

Only regarding ICOs of utility tokens.

If an ICO/ITO was to approach me today I would simply say this do everything you can to block USA traffic. This is one regulator you don’t want to have on your back. It’s the only regulator who has proven it can fine, persecute and jail those who break securities law. Today many lawyers in the USA see the ICO as securities based on the Whitepapers most of the ICO are publishing. In the world of securities smells, tates, then its securities.

A recent article posted on LinkedIn by a lawyer reviewed a number of ICO and their whitepaper all of them were deemed issuing securities.

simple things like:
use of funds

So in summary. Block and be safe for now

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@oscar that sounds like sage advice (albeit a bit depressing if you are an entrepreneur or investor in the USA).

its not meant to sound discouraging but ICO/ITO need to understand.

When ever you have money and investors. REGULATORS will sit and watch. Unfortunately there is always going to be 1 or 2 or a few that will spoil it for vast majority who want to use this form of capital raising.

IF you are doing an ICO/ITO today its going to be different than how it was done 1 year or 6 months ago.
You need to be clear in your white paper, there is more lawyers who can now advise you in preparing this document that becomes your manifesto for your ICO/ITO

-show your plan
-your operations
-team ( so people know who they are dealing with)
-have a plan to communicate to the investors

Do KYC on each investors and AML
this is now a requirement for all of us regardless of how funds are raised. Today you cannot even buy a house without the real estate broker doing an AML check.

This is GLOBAL you fail this, the regulators will come down hard, because the tools are there and this what they see as a good way to safeguard the market place.

So when regulators do finally decide to jump in: they will have a list of those who are in low risk vs high risk and begin to start investigating.

My advice be in the low risk :slight_smile:

@oscar sound advice, which I really see in the context of what @jackusc wants to do

It is a good reading about the topic.


What about Canada @oscar?
Should Canadian IPs be blocked too for similar reasons?

I am advising a venture for an upcoming ICO (still not publicly announced) and the painful decision has already been to block US IP adresses for the exact reasons you mention here.

@BernardLunn one crucial point that we need to add to the topics is addressing the valution methods. To be honest, most whitepapers or offering memorandums do not mention about their valution method. It is very difficult to suggest one universal method since ICOs are quite different in their nature. But for a sound market and true valuations, this problem should be addressed in self regulatory conduct. For example, how can you value a token that wiil be used for p2p lending or say for investing in app portfolios? They are completely different scenarios. What we can suggest here is any ICO offering should prove its initial valution with universally accepted method relevant to its case. Again, ICO rating agencies could help less informed investors with the decision that whether or not those valuations are correct. At the end of the day nobody wants to pay more than it deserves even it is few cents per token. Valuation is also important after ICOs to determine the price. We simply cannot price the tokens based on supply and demand. That would lead the market to a bubble. Investors need a reference value for whatever digital asset they are purchasing. In traditional markets equities for example are valued based on future cash flows and growth opprtunity of the company. If there is so much deviation from this fundamental value then an arbitrage opportunity arises.

Check out this post on Responsible protocol token funding from Tom Ding is building next-gen blockchain and open protocols at String Labs,

good find @Efi I particularly liked:

A startup funded by private company has a fiduciary responsibility to maximize shareholder values, first and foremost.

A protocol (instance)’s objective, on the other hand, is to maximize values to all of its public participants.

He covers a similar set of issues to what we defined above. One that he highlights as contentious is Cap or No Cap. My suggestion is that default is Cap and Issuer justifies if they want No Cap. There is no reason no to issue more Tokens if price takes off, but too much hype at the conceptual/white paper stage/mvp stage seems dangerous to me.

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The Civic ICO (still live with a major glitch yesterday - ETH flash crash + Coinbase shutdown) is an example of self-regulation. They tried to allow all interested investors in. Read more here.

I like how Civic are doing it. The issues are similar to traditional IPOs, how you ensure that it is not just connected insiders who get allocation (aka whales). Personally I like to wait till after IPO or ICO and buy in after market. I miss some quick wins but also miss some quick losses. That way you can see how they execute.

Civic has something live at least in the US, so they wont go into stealth mode for 6 months or so, like other “white paper” ventures.

Dear @BernardLunn, was very pleased to find this community and conversation, and hope to be able to contribute to the discourse in this fast-evolving area, especially from an Asian perspective as well as from prior life as an IPO lawyer.

For your information, I will be moderating the first event of the Fintech Association of Hong Kong next week, which will be on The Road Towards Best Practices in Token Sales/ICOs, featuring practitioners involved in the recent OAX token offering: https://www.eventbrite.hk/e/token-sales-and-initial-coin-offerings-icos-the-road-towards-best-practices-for-developers-and-tickets-36130833295?aff=es2

I believe that the OAX token sale (which I was not involved with) featured quite a few good elements that can form part of the basis of best practices worldwide, and would most welcome your collective thoughts and input.