SEC Exemptions for ICOs

There are several ways to raise capital for your token-based

technology company using exemptions such as Regulation CF,
Regulation A+, Regulation D, Regulation S, or an ICO funding
platform.

1. Regulation Crowdfunding (Reg CF)

Reg CF or Regulation Crowdfunding is relatively new and makes it

legal for the private placements to be marketed to non-accredited
investors. Think Kickstarter with equity (or debt) being offered.

Example: https://www.startengine.com/indeco

Securities purchased under the Reg CF exemption cannot be

resold within a year. Only $1,070,000 can be raised each year.

NB: you can raise unlimited dollars by running a concurrent

Regulation D, Rule 506(c) offering for accredited investors.

You will need to file an annual report with financial statements. If

you neglect to do so, you will be unable to fund-raise with Reg CF
again until you file the missing annual report.

NB: However, you may still raise funds from accredited investors
using a Regulation D exemption!

2. Rule 506(b and Rule 506(c under Regulation D.

Examples of Reg D ICOs: Filecoin http://coinlist.co/filecoin

Rule 506 is the easiest and most-used exemption. There is no limit to

the amount you can raise. Under the Rule 506(c exemption, general
solicitation and advertising are permitted. Only accredited investors 
may invest. See www.privateplacementadvisors.com for more
information about Rule 506(c offerings of ICOs.
3. Regulation S is a commonly used exemption.
First, US companies that want to sell their securities to foreign
investors will want to use a SAFT. A SAFT is similar to
the SAFE “Simple Agreement for Future Equity” framework used by Y
Combinator.
A SAFT is the instrument used to convey rights in tokens prior to the
the tokens becoming functional. Since the SAFT itself is a security it
can be offered in a private placement to accredited investors. The
tokens ultimately delivered to the investors, though, should be fully
functional and therefore not securities under U.S. law.

With the Regulation S exemption the sale of securities must be an

offshore transaction to a foreign investor and there must be no selling
efforts that target the U.S. market. At the time of purchase, the
investor must be outside the U.S., or at least the issuer reasonably
believes that the purchaser is outside the U.S.

An offering does not qualify as exempt under Regulation S if anything

is done in connection with the offering to the purpose of
“conditioning” the U.S. market. Issuers cannot advertise the offering
in the U.S., mail printed materials to U.S. investors, or have
promotional seminars in the U.S.

NB: Companies can initiate Reg S selling efforts from the U.S. if the
efforts are directed abroad.

You can sell securities offshore without regard to the sophistication or

number of purchasers in the offering or the size of the offering. You
can raise as much as you want from an unlimited number of people.
Unlike Rules 506(b and 506(c of Regulation D, Regulation S does not
have specific information requirements.

An issuer who makes a Reg S offering online may do so without

jeopardizing its exemption by including prominent statements on its
website saying that the offer is directed only outside the U.S.

A PPM (Private Placement Memorandum) is not required for a

Regulation S offering, but steps must be taken so that foreign
investors understand the structure, principals, and risks associated
with the offering.

NB: Regulation S and Regulation D Offerings can be combined.  

A Regulation S offering may be conducted concurrently with a

Regulation D offering to U.S. accredited investors without the
offerings being deemed integrated.

Securities sold under Regulation S are subject to resale restrictions.

The nature of the restrictions depends on whether the issuer is foreign
or domestic; whether the issuer is a public company; the types of
securities being sold; and whether there is a “substantial U.S. market
interest.” The securities being sold must contain a legend stating that
the securities may not be resold to US investors for a restricted period
of time.

4. Regulation A+ is designed for companies who want to raise more

funds publicly, but don’t want to do a full-blown IPO yet.

Example of Reg A+ ICOs are:

FCFL https://app.microventures.com/proposed/fcfl-506c, and

GAB https://www.startengine.com/gab-select

You can raise up to $50 million per year from anyone. (Soon to be $75
million. You can advertise your fundraising while you “test the waters”
and solicit investors before filing with the SEC.

It is expensive. Before you can start fundraising and collect funds, you
need to pre-file an offering placement memorandum (OPM) with the
SEC. An OPM is like a business plan wrapped with a whole bunch of
legal disclaimers, and can cost well over $50,000 in legal fees.

It is very time consuming. Regulation A+ offerings can be tedious and

take significant time. Schedule may include 30 days to compile the
required documents; 21 days to complete and submit the forms; up to
45 days to get SEC approval.
5. ICO Funding Platform Options

Here are some platforms that are friendly to ICOs. This is easier than
going it alone but you will end up paying 6%-8% of what you raise to
the platform.

StartEngine: https://www.startengine.com/ico
Indiegogo: https://ico.indiegogo.com/
Coinlist: http://coinlist.co.
______________

Join the State Securities Regulation LinkedIn discussion group and go

down the crypto rabbit hole with us to learn 1) what will constitute
securities in the eyes of state regulators and 2) what will constitute best
practices for exempt offerings of ICO offerings.

Douglas Slain
The Exemption Guy

Members of the discussion group are entitled to any of 21 audio

handbooks on exempt offerings@
https://www.audible.com/search/ref=a_hp_tseft?advsearchKeywords=Dougl
as%20Slain&filterby=field-keywords