A lawyer from crypto investment arm of Andreessen Horowitz (a16z) advises web3 projects to refrain from public token sales in the US due to potential legal risks under SEC's securities laws. Despite the industry's shift away from public token sales in the US, new schemes continue to emerge, leading to the recommendation of alternative fundraising methods such as public sales outside the US, private sales, and equity offerings.
U.S. Regulatory Landscape Casts a Shadow Over Token Sales: a16z Crypto Lawyer Warns of Legal Peril
In a compelling analysis, Miles Jennings, General Counsel at a16z Crypto, the crypto investment arm of venture capital titan Andreessen Horowitz (a16z), has issued a resounding caution to web3 projects against conducting public token sales within the United States. This unequivocal stance stems from the Securities and Exchange Commission's (SEC) unwavering stance that Initial Coin Offerings (ICOs) fall squarely within the ambit of securities laws.
Jennings' assertion is anchored in the SEC's consistent stance that the hallmark of a security lies not in its digital or physical form but rather in the expectation of profit derived from the efforts of others. In ICOs, he underscores, token issuers often make unequivocal representations and promises to investors, explicitly outlining that proceeds from the token sale will be used to fund operational activities and deliver future returns. These scenarios, Jennings emphasizes, constitute securities transactions, regardless of whether the instruments being sold are digital assets or traditional shares of stock.
The SEC's firm stance on subjecting ICOs to securities laws gained traction amidst the widespread popularity of this fundraising mechanism in 2017. While the industry has since shifted away from public U.S. token sales, Jennings observes a concerning resurgence of ICOs in novel guises.
"Some entities resort to inventing new schemes, harboring the hope that minor factual tweaks will somehow warrant a different legal outcome," Jennings notes. "Examples of such tactics include 'Protocol Owned Liquidity' (POL), where decentralized autonomous organizations (DAOs) engage in indirect token sales and subsequently control the resulting proceeds through decentralized governance, and 'Liquidity Bootstrapping Pools' (LBPs), which involve indirect token sales via liquidity pools on decentralized exchanges."
Jennings urges web3 projects to exercise vigilance in steering clear of such schemes, emphasizing the availability of alternative fundraising avenues that do not carry the risk of regulatory scrutiny and potential legal entanglements.
"Public sales in the U.S. are akin to an 'own goal' that should be avoided at all costs," Jennings declares. "Alternative avenues, such as public sales of equity and tokens outside the U.S. and private sales of equity and tokens, can be pursued in a compliant manner, without the risk of running afoul of securities laws."
Jennings' cogent analysis serves as a timely reminder to web3 projects of the paramount importance of navigating the regulatory landscape with prudence. By heeding this counsel and opting for compliant fundraising strategies, projects can mitigate the risk of legal pitfalls and position themselves for long-term success.
