"The idea is to be proactive and engage regulators to foster goodwill," said Meltem Demirors, director at the Digital Currency Group in New York.
When registering token sales with the SEC, companies are using short Form D filings, the same type of document that start-ups use to disclose private venture rounds. They only provide basic information, like the name and contact information for principals and the industry group. In a section that asks what type of security is being offered, where a typical start-up would select "equity," these companies are checking the "other" box and writing in something that includes the word token.
ICO filings with the SEC account for a small fraction of the more than $2.7 billion that's been raised through token sales this year. There's so much chaos in the global crypto market that the Chinese government banned all ICOs in September, classifying them as illegal ways to raise money. On Wednesday, Reuters reported that Russian authorities plan to regulate the market and will determine how by the end of the year.
Most of the projects going the SEC route are using a framework called the Simple Agreement for Future Tokens (SAFT), which was created by crypto start-up Protocol Labs and used for the first time in August. The agreement lays out how the tokens can eventually be used and provides for certain investor protections in case the project dissolves.
Unlike many ICOs, SAFTs are limited to accredited investors for people in the U.S., meaning ordinary retail investors can't participate.
"The view people are starting to settle on is that a pre-sale of a tokenized service needs to be done as a sale of a security," said Lowell Ness, a partner at law firm Perkins Coie and an expert in securities law. "They use the proceeds from that sale to go build the network. Once the network has been built and the token is fully functional and could be immediately used, then it's OK to deliver the token to the world."
For example, Kik Interactive's new blockchain-based network was not yet up and running when the online chat company raised $50 million in August, so it sold SAFT securities to accredited investors and filed with the SEC.