Initial Coin Offerings Surge-Accredited Investor Verification 101

August 11, 2017

Issuers of Initial Coin Offerings aka ICOs, Initial Token Offerings, TGEs and Accredited Investor Verification

“This ain’t your grandfather’s IPO. Or is it? If the initial offering of a crypto-based token, commonly referred to as an Initial Coin Offering aka ICO, even if framed as a “Token Generation Event” aka TGE, looks like a duck, walks like a duck and quacks like a duck, a right-minded Issuer will need to stay inside both US and other countries’ securities regulation goal posts by conforming to accredited investor verification guidelines.” Paul Azous, CEO,

Fact: July 2017  was the biggest month for coin offerings, with 34 projects raising $665 million,  or twice as much money as was raised in the first five months of the year combined.

Fact: As of Q3 2017m 46 new coin offerings have been announced and an additional 204 are moving toward fund-raising, according to data from

Fact: The ‘avalanche of bitcoin-flavored private offerings that map to cryto-centric initiatives resulted in the US SEC issuing formal guidance on July 25, 2017. That statement (see below) included specific guidance with regard to accredited investor verification and compliance with regulatory edicts pertaining to the sale of securities.

Fact: As of August 10, 2017, the amount of money raised by start-ups via so-called initial coin offerings (ICOs) has surpassed early stage venture capital (VC) funding for internet companies on a y/o/y basis.

In Silicon Valley and other “Techland” outposts, those seeking to raise capital have traditionally followed a beaten path. Step 1 (also known as “A round”) comprised of Friends & Family Investors; Step 2 (or “B Round”) comprised of Angel Investors; Step 3: Venture Capital/Professional Investors; Step 4: Initial Public Offering (IPO).

Each of the first three aforementioned ‘rounds’ (some of which might be by-passed) are referred to as a private placement. When advanced properly, those private placement offerings will include a private placement memorandum, whereas an initial public offering (IPO) calls for a “final offering prospectus.” Most private placements promulgated via SEC Regulation D Rule 506(c) and/or Regulation S aka RegS, are offerings that aim to raise money from [sophisticated] private investors. Irrespective of whether those investors are VCs, private equity firms, institutional fund managers (also known as QIBs) or high-net-worth (HNW) investors, the US Securities & Commission has an “axe” of one kind or another with regard to regulating the sale of these private securities, whether they are in form of debt, equity or combination thereof. That interest on the part of securities regulators inevitably leads to “accredited investor” rules, as it is the Issuer’s obligation to take specific steps that verify in advance of a securities sale the investor(s) are properly accredited to purchase said securities.

An accredited investor is an individual person or entity that can purchase securities not registered with financial authorities by meeting specific criteria and/or requirements with respect to income, net worth, asset size, governance status or professional experience.

It is the Issuer’s obligation therefore to confirm that said investors have been subject to accredited investor verification processes. Generally, the process is straightforward, but it does require information forms to be completed and reviewed by a certified expert. In the event the Issuer does not have an internal process that conforms to regulatory guidelines, the Issuer can engage a third-party accredited investor verification service, or defer to the either of (i) broker-dealer or placement agent, (ii) licensed attorney, (iii) certified public accountant or (iv) investment adviser) to perform this function.

Who is a ‘accredited investor’?

Within the context of Initial Coin Offerings (ICOs), Initial Token Offerings (ITOs) and/or Token Generation Events (TGEs) which represent the very latest trend with regard to ‘bitcoin-flavored’ capital raising strategies, traditional private placement memorandums have been displaced by “white papers” published by the Issuer. These documents typically conform to the basic components of a typical business plan, including use of proceeds, but they are often opaque.

As such, in Q3 2017, the US Securities & Exchange Commission (SEC) as well as securities regulators in various non-US jurisdictions addressed the increasing number of crypto-currency and/or distributed ledger-based capital raises via public statements advising Issuers whose underlying business model is based on a cryptocurrency, bitcoin and/or distributed ledger theme and seek to circumvent traditional private placement processes* that said Issuers likely need to conform with long-established accredited investor verification procedures.

* those who rely on various regulatory edicts that govern the issuance of non-public securities to investors, including those that may or may not depend on or include a role played by a licensed broker-dealer, underwriter or placement agent(s), but do require a regulatory compliant offering memorandum.

Many entrepreneurs creating virtual currencies have argued that they are not securities because they are intended to be used as the internal method of payment in the software that the entrepreneurs are creating. Those folks can argue as much as they want, and those who are advancing capital raising initiatives via ICOs or similar offerings will likely have be provided the opportunity to defend their argument—when they are confronted with subpoenas by the SEC or securities regulators within the domicile/regions that govern the Issuer and/or protect respective investors.

Below extract from July 25, 2017 US SEC investor alert partially qualifies the SEC’s view:

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