In late 2018, CarrierEQ Inc. (Airfox) and Paragon Coin, Inc. were investigated and ordered by the SEC to make refunds available to their investors – in sum, the SEC’s order meant that Airfox may have to refund nearly 15 million dollars while Paragon would have to potentially refund 12 million dollars. These SEC reports highlight the importance of hiring an experienced blockchain attorney in this emerging field of law. From drafting your Articles of Organization to structuring your initial coin offering (ICO) or security token offering (STO), protecting the cryptocurrency of your clients with an experienced Silicon Valley blockchain attorney at Structure Law Group, LLP is essential.
Understanding Security Token Offerings (STO) & Blockchain Technology
Unlike well-known digital currencies like Bitcoin or Ethereum, STO’s are security token offerings that allow companies to sell digital tokens to accredited investors prior to the digital tokens having any technical functionality. This means STOs are often governed by federal security laws and must be registered with the SEC or find a proper exemption from registration. STOs are designed to function as traditional securities but are offered, sometimes in fractions, through blockchain transactions. Blockchain technology offers many benefits, including:
- Reduced administrative costs
- Greater liquidity of assets
- Faster and cheaper public offerings
- Enhanced security
- Greater transparency
- Global trading capacity
Blockchain” acts as digital transaction ledger, recording transaction history and owner details. Blockchain technology itself validate transactions and allows users to interact with one another and provides users with information in a decentralized location. Blockchain technology is designed to be an incorruptible digital ledger and, if corrupted, such would be easily identifiable and traceable. Such technology is key to trading in digital currency, which is nearing a $400 billion market share.
Structuring an Initial Security Token Offering
Technology has come far enough that businesses are able to structure STOs without using blockchain and business attorneys, blockchain or cryptocurrency experts. While this is tempting from a financial standpoint, ease of administration doesn’t mean your legal obligations are likewise relaxed. Blockchain-based tokens are often merely representations of the future, speculative functionality and value that your tokens will provide.
You must consider SEC regulations, CFTC, FINRA, IRS (tax consequences), and federal and state business laws when conducting an STO using blockchain technology. Further, because the liquidity of cryptocurrency differs from that of traditional assets, certain businesses sometimes enter into “smart contracts” for dividend distribution which creates an additional layer of regulatory complexity (and compliance). Such contracts may qualify as investment contracts, which are subject to specific regulations and disclosures under the Securities Act. Don’t be fooled by the relative ease by which technology providers allow you to “create” an STO using blockchain technology.
The Role of San Jose Blockchain Attorneys in San Jose
Blockchain law is an emerging area of practice among business and securities attorneys. United States and international laws are constantly evolving to catch up with the legal implications of this new technology, which may result in unexpected legal consequences. The experienced blockchain and ICO/STO attorneys at Structure Law Group, LLP are constantly monitoring the legal implications of using blockchain technology for your business. We can help you structure your STO, file appropriate documentation with the SEC, and even review your business contracts to ensure digital asset protection. To schedule your consultation, call us today at 408-441-7500 or contact us online.