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What is an Initial Coin Offering (ICO)?
Similar to an Initial Public Offering (IPO), an Initial Coin Offering (ICO) (or token offering) is the way funds are raised for new blockchain based startup cryptocurrency offerings. Since cryptocurrency is decentralized, nearly anyone can launch an ICO given the use of the right technology. To create an ICO you would create a white paper detailing how the coin would work, ask for funding in either crypto or fiat money from people and in return you send them the coin or token you’ve created. Should this initial coin you created gain high circulation then the value of the coin will increase. As the creator of the coin, you have now created a new cryptocurrency that could rival other ICOs like Ethereum. When creating an ICO there are various legal documents that need to be reviewed and compliant.
How are Initial Coin Offers created?
Anyone can create an ICO with the right team and technology in place. Below are common steps taken to create an ICO.
Next, you want to develop a token. You can do this by either creating your own blockchain or fork an existing blockchain in which to program your token on. You’ll also want to set up and finalize your smart contract. The smart contract that exists on the blockchain will make automated transactions of your token between buyers and sellers with encoded preset rules.
As you’re developing your token, you’ll need to budget that token. Identify the funds you’ll need to raise though your ICO (hard caps or uncapped with fixed rates), consider conducting an ICO pre-sale to drum up enthusiasm, and allocate a number of tokens to founding and developmental teams.
Why do I need legal guidance on ICOs?
Entrepreneurs looking to hit it big with the next, new ICO are aware that there is big risk and big reward. It’s best to err on the side of caution legally when dealing with such high risk from both a documentation standpoint and Securities and Exchange Commission (SEC) compliance standpoint. Here is a list of the possible paperwork that is legally required or will require legal review for an ICO.
If your ICO is a security offering, then it may need to register with the SEC as well as develop some other documentation. To stay compliant with the SEC, legal requirements may include:
- Register with the SEC
- Create Know Your Customer (KYC) Policy and Procedures documentation
- Create Anti-Money Laundering (AML) Policy and Procedures documentation
Glossary of Important Terms
Here are some important terms to learn when it comes to Initial Coin Offerings: