7 Things to Consider When Doing an ICO

The US Securities and Exchange Commission published an investigative finding into the Ethereum DAO (https://www.sec.gov/litigation/investreport/34-81207.pdf) on 7/25/2017 providing a bit of insight into cyber currency Initial Coin Offerings (ICOs).

The bad news is that it appears the SEC has tagged an ICO as a security offering. The good news is that they've chosen not to prosecute the DAO (and Slock.it, the organization that authored the DAO smart contract). Even better news is that they provided insight into how they view ICOs and what a startup contemplating an ICO should consider.

If you're considering an ICO follow these steps:

• Construct a smart contract that issues tokens, not ownership rights into your organization.
• Do not promote the token as an investment vehicle or an asset that will, over time, yield a profit.
• Specify clearly how token ownership can changed. For example ensure that once the token is issued within the context of the contract, ownership can only be transferred by clearly documented rules within that contract - e.g., between users of your product or service or between the token issuer and the 'user base'.
• Provide token liquidity through an alternate smart contract that provides token buyback, or a refund - something akin to a convertible debt agreement.
• If the smart contract resides on Ethereum, accept only Eth as payment for the tokens. Eliminate the use of fiat currency where possible.
• Identify the token as the only means for participating in the network you're creating - somewhat similar to what RPC (ripple) has done.
• Offer the tokens in bulk at some discount to a future post sale price - it's similar to what Kickstarter is doing. Examine the language in the Kickstarter buyer/seller agreement for clarifying language.

Due to the nature of, in this case, Ethereum you cannot prevent private party exchanges of your token. However you can ensure that you do not promote or broker those exchanges.

If a secondary market does arise for the token (in reality you hope it does) then you've created the necessary shield to limit an SEC investigation.

Thoughts?