Perhaps no aspect of the cryptocurrency and blockchain space has been as murky from a legal perspective in the U.S. as the initial coin offering (ICO). Popularized over the past year, ICOs offer companies a way to crowdsource funds which they then ostensibly use to launch a new cryptocurrency, token, or related startup.
ICOs have been fraught with legal issues from the time they began, as investors have struggled with companies that don't follow through on their promises, and the potential for hacks and fraud. But while a lot of attention has been paid to the ways that federal prosecutors and regulators like the SEC view the ICO, there are more personal legal implications to consider as well. (See also: SEC's Cyber Unit Files Charges vs ICO Scam That Raised $15M.)
Individual Lawsuits Possible
According to a report by Coin Desk, "buyers can sue sellers privately under the federal securities laws" which govern similar types of transactions. Companies and individuals looking to make sales in the ICO process (or in similar types of transactions) should be aware of these risks.
At the same time, in the ever-changing world of initial coin and token offerings, buyers should know that there are remedies available to them if they are treated unfairly throughout the process.
Is Cryptocurrency a Security?
A great deal of the legal details concerning ICOs comes down to the question of whether or not a coin can be considered a security. This is one of the most hotly contested issues in the cryptocurrency world, and a simple answer remains elusive. (See also: SEC Chair Testifies About Cryptocurrency Regulation Before Congress.)
In cases where an ICO does constitute an offering of a security, federal law stipulates that the seller of that security must register it or find an exception. If the seller does not, the SEC may step in to enforce the sale or sanction the seller. Most investors in ICOs are at least somewhat familiar with the security classification issue and its ramifications.
However, fewer ICO investors know that the Securities and Exchange Act of 1933 stipulates that a person who buys an unregistered security can actually sue the seller individually to get his money back. This puts some of the power to determine whether an ICO is or is not a securities sale in the power of the individual investor. This legal detail also means that the remedy would be wide-ranging, and a company implicated in such an unregistered security sale might have to completely refund the investor base. (See also: SEC Warns Investors About Scam ICOs.)
Investing in cryptocurrencies and other 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 other 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 cryptocurrencies.