Testifying before the Senate in early February, Securities and Exchange Commission (SEC) chair Jay Clayton said he believes "every ICO I've seen is a security." Coming from the U.S.'s top markets regulator, those words struck fear into the hearts of blockchain entrepreneurs, who in no way want their initial coin offerings to be burdened by the expense and scrutiny imposed by securities law.

With the exception, that is, of Joe Forbes. The CEO of Causam eXchange Inc. is perfectly willing to refer to the company's upcoming sale of blockchain-based assets to investors as a securities offering. That's because the Raleigh, N.C.-based company – which bills itself as "Visa for the electric grid," linking energy consumers and providers – will not be selling a token, but actual stock in the company housed in smart contracts on ethereum.

"This process started about six months ago," Forbes told me by phone, explaining that Causam had been working "to create what we believe to be the first 506(c) SEC-compliant securities offering in an instrument that is executed over a complex contract in ethereum that we call a BITE. And BITE stands for blockchain instrument for transferrable equity." 506(c) is an SEC rule that exempts companies from registering securities offerings that meet certain requirements.

One of these requirements is that only accredited investors – those who meet certain income and asset criteria – can participate. Causam eXchange will open the pre-sale for its BITE to a maximum of 1,000 accredited investors on March 8. It aims to raise $15 million. Investors will be subject to a lockup period, but they'll be able to exchange their ethereum-based stock for traditional, "paper" shares. (See also, Is Ether a Security? SEC Chair Sows Confusion.)

It's worth noting, though, that issuing stock through a blockchain is not entirely unprecedented. Overstock.com Inc. (OSTK) issued preferred shares on the bitcoin blockchain in late 2016.

Not a Utility Token in Sight

ICOs are intentionally reminiscent of the initial public offering (IPO), but very few entail an ownership stake in a company the way Causam eXchange's BITE will. One reason is that such an offering would undoubtedly raise eyebrows at the SEC.

Rather, companies sell tokens in order to raise money. The tokens themselves are presented as "utility tokens": they serve as a way to shape incentives on the blockchain, with nodes on the network exchanging them as payment for services. A CEO of a company developing a blockchain-based app recently told me, "the token has a very specific purpose on this platform and a very specific utility. I don't know if an exchange will care about our token and if they do, that's on them. I hate to say I'm just not interested, and that's because I'm not interested."

There is no requirement that an instrument represent an ownership stake in order to qualify as a security under U.S. law, however, and the SEC has already shut down a couple of coin offerings for ostensible "utility tokens." While issuers argue that people should buy tokens in order to make use of their platforms, in the vast majority of cases, buyers are speculating on the tokens' secondary-market price. (See also, ICOs: The Beginning of the End?)

Separate from its ethereum-based equity offering, Causam eXchange has built an energy trading platform housed on an independent blockchain. This platform dispenses with utility tokens. "A newly minted token is not recognized as a liquid instrument for goods and services," Forbes told me, so the platform's smart contracts will enable compensation in existing cryptocurrencies such as bitcoin and ether, as well as fiat (though the latter can't be executed on-chain).

"The goal," says Forbes, "is to try to provide an alternative to speculative investing in instruments like minted coins and ICOs. We think this is a much better way to go."

 

Investing in cryptocurrencies and Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns no cryptocurrency.

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