If you were under the impression that ICOs are not regulated, that is simply not the case. There is a significant effort on a worldwide basis to regulate these offerings. Some have argued that an ICO involves tokens that are utilities and therefore are not technically securities, and as a consequence, ICOs don’t need to comply with accredited investor laws. However, if the ICO consists of security tokens, it may be restricted to accredited investors – and the U.S. Securities and Exchange Commission (SEC) has indicated that virtually all ICOs are securities offerings.
Common Exemptions
If ICOs are securities offerings, then registration and registration exemptions apply. The most common exemptions used in ICOs are Rule 506(c), Reg S, and Reg A+. Reg CF is less frequently used due to the $1 million capital raising limit and burdensome compliance obligations. Investor accreditation is required for ICOs offered under Rule 506(c), but not for the other exemptions listed. Most of the time Rule 506(c) is used since it is the easiest to comply with and allows U.S. investors to participate. Under this Rule, the issuer must take reasonable steps to verify that you are an accredited investor.
The Rule 506(b) exemption is usually used for a private presale of an ICO. This exemption permits a maximum of 35 non-accredited investors. Many times, however, investors will be limited to exclusively accredited investors. Rule 506(b) doesn’t require proof of accredited investor status, but it also does not permit general solicitation.
ICO Accredited Investor Status Preferred
Due to their financial security, accredited investors are preferred by ICOs in crowdfunding investments. This is one of the ways they can claim exemption from SEC registration requirements.
Therefore, technically, unless you have accredited investor status, you’re not permitted to participate in some ICOs. However, U.S. citizens may potentially participate in an ICO if the offering is registered with the SEC.
Currently, the law may come down on ICOs that have permitted a U.S. citizen to participate without verifying his or her accredited status. However, this area of the law is being dealt with and changed on a consistent basis. Familiarizing yourself with the latest developments in the laws governing securities is the best course of action in order to ensure your ICO investment does not expose you to unnecessary risks or penalties.
