1. Policy objectives and underlying principles for the regulation of IPOs

Capital markets regulation has the ambition to provide a clear, yet flexible framework with a multi-pronged objective of protecting issuers and investors from any potential fraud or abuse, while fostering economic growth. With regard to securities, the International Organization of Securities Commissions clearly summarises the three key objectives of securities regulation:Footnote ² (i) protecting investors; (ii) ensuring fair, efficient and transparent markets; and (iii) reducing systemic risk. The regulation of IPOs, whether in Europe or in the US, aims at fulfilling these three broad regulatory objectives.

The ordering of these objectives suggests that investor protection is the first concern of securities commissions. In fact, in the wake of the 2008 financial crisis, the need for investor protection has been recognised of utmost importance in a set of high-level principles on consumer protection in the field of financial services which was called for by the G20 Finance Ministers and Central Bank Governors in February 2011,Footnote ³ and introduced in October of the same year.Footnote ⁴

The second objective underlines the economic importance of having efficient markets so that issuers can find investors to finance their operations, through a fair and transparent process. According to standard economic theories, one of the central market functions is to maximise economic welfare and economic surplus.Footnote ⁵ One of the key issues that may hamper the good functioning of markets is information asymmetry. According to Akerlof’s seminal paper on the market for “lemons”, adverse selectionFootnote ⁶ may drive high-quality products out of the market, and potentially unravel it.Footnote ⁷ Maximising economic surplus through an efficient market mechanism means that funds should find their way to an actual investment project every time it is mutually advantageous for the parties concerned. In a world without information asymmetries, this can be achieved via market mechanisms alone. However, markets are littered with uncertainty and information asymmetries. Insurance or financial market theorists, in the wake of Akerlof, have long been aware of the potentially destructive power of information asymmetries. Some market-based solutions have been suggested to mitigate the impact of information asymmetries and adverse-selection, with techniques such as signallingFootnote ⁸, intermediation and third-party certification, or “buyer search” – whereby purchasers can acquire information on the true status of goods sold at a cost, by “visiting” a seller or testing the product for sale – as reviewed by Fox.Footnote ⁹ In the context of an IPO, part of an underwriter’s value, as an intermediary, is precisely to use its reputation to certify that the offering price reflects the issuer’s insider information, which investors are not aware of, or simply cannot be sure of.Footnote ¹⁰ However, as Fox shows,Footnote ¹¹ these methods are not perfect antidotes for eradicating the adverse effects of information asymmetries, especially when dealing with public offerings of securities that are not already traded in a secondary market.Footnote ¹²

The last objective of reducing systemic risk has been emphasised ever since the 2008 subprime crisis “spilled over and became the catalyst for a much broader global financial crisis”.Footnote ¹³

Stepping back, it can be observed that economic and financial history has been fraught with examples where one – or several – of the three aforementioned objectives were trampled upon. From the South Sea Company bubble of 1711–1720 to the great crash of 1929, and the crisis of 2008, there are many instances where investors have been ruined by collapsing share prices. Investor protection is a difficult goal as financial markets can go mad, and investors may be prone to irrational exuberance. Similarly, the fairness, efficiency and transparency of markets is another difficult objective to achieve, as markets can be manipulated by powerful actors.Footnote ¹⁴ Lastly, the recent subprime crisis has shown that systemic risk can gradually build up and remain unnoticed until it is too late. Furthermore, these three goals are inherently correlated and it will be hard to achieve one without the others. For instance, an efficient control of systemic risk will require a certain level of transparency in the markets, just as investor protection will be hard to achieve if another systemic crisis were to unleash its devastating effects. We now turn to analysing the regulatory framework established in Europe and in the US to achieve the three objectives of securities law.

2. Policy objectives and underlying principles for the regulation of crowdfunding

Crowdfunding is generally understood as the act of soliciting a large number of small individual investments or contributions from a large number of people, usually via the Internet. The goal is to collect and commit funds to the achievement of a particular project or initiative – eg the production or provision of a particular good or service – that will ultimately benefit the funders, either directly or indirectly. Crowdfunding is particularly useful for small enterprises, startups and early-stage initiatives that cannot rely on institutional funding sources.

It is possible to distinguish the different modalities of crowdfunding into four distinct categories.Footnote ³⁷

1. (i) Reward-based crowdfunding, whereby funders receive non-financial rewards in return for their contributions (eg merchandising like t-shirts and CDs, specific privileges such as VIP tickets and backstage access to concerts, or actual products in the case of pre-sales). The rewards or “perks” are usually dependent on the amount of contribution provided by each individual funder, where the greater the contribution the better the rewards will be. Reward-based crowdfunding is often geared towards the support of creative endeavours, like film or music production, concerts, books or other artistic projects. The financial contribution provided by funders is motivated by a combination of intrinsic and social motivations, along with a desire for the rewards. Depending on the modalities, the contributions can be regarded either as a plain donation or as an actual pre-purchase. While the process does not necessarily need to be done via online means, it has become highly popularised with the advent of the Internet, which has spurred the emergence of a large number of crowdfunding platforms – Kickstarter and IndieGogo are today two of the most popular examples of this type of crowdfunding.Footnote ³⁸

2. (ii) Equity crowdfunding, whereby funders are rewarded with an equity stake in a private company in return for their contributions. Funders essentially engage in profits/revenues sharing with the particular business or initiative they are investing in, and can also be granted voting rights. Equity crowdfunding is particularly common for early-stage companies and startups which are not sufficiently established to attract venture capital investments. It can also be used as a form of investment fund, aggregating the funds of multiple small investors that collectively purchase shares in a company; or as a typology of collective investment, whereby the contributions of multiple funders are combined into a large and diversified portfolio. The contribution provided by funders is mostly motivated by financial rewards, as funders generally expect the businesses they invest in to be successful and to generate a significant return on investment, through dividends or shares appreciation. In all cases, the financial contributions can be assimilated to an investment, and the equity stakes granted to the investors are essentially securities.

3. (iii) Lending-based crowdfunding, whereby borrowers can borrow money directly from lenders, without any financial institution. This type of crowdfunding is used in the context of micro-financing, for early-stage businesses and initiatives seeking debt-based capital, and in the context of peer-to-peer lending, whereby individuals use their savings to issue micro-loans to other individuals in need, at a particular interest rate. Lending-based crowdfunding represents a potential alternative to bank credit, especially in the developing world. Risks are lower because of the direct connection between lenders and borrowers and, where a secondary market for micro-loans exists, systemic risk is also reduced because a lender’s strategy is only dictated by the solvency of borrowers in the loan portfolio, rather than on the strategy of other lenders. Yet, because of the peer-to-peer nature of these transactions, financial intermediation is usually done by Internet platforms that connect lenders and borrowers directly. To further reduce risks, these platforms often implement a credit-score system, and retain some of the risk they facilitate (eg by co-investing in the loans or establishing funds to absorb the first losses).

4. (iv) Donation-based crowdfunding, whereby individuals donate funds to a particular project or initiative, often with a social or philanthropic purpose, without receiving anything in return. Funders’ motivations, in this case, are mostly based on social or intrinsic motivations, and the contributions provided are simple donations.

Given the particularities of these different modalities, they do not all fall within the same regulatory framework. Equity-based and lending-based crowdfunding are – by virtue of their financial returns and risk elements – likely to fall under the umbrella of securities regulations, whereas donation-based and reward-based crowdfunding are much less likely to be concerned with these types of regulations.

1. The ICO process

An ICO consists in issuing a set of “tokens” on top of a blockchain infrastructure, and offering them to the public in exchange for a financial contribution, as a means to raise funds for the development of a particular blockchain-based project or initiative, to which these tokens are inherently linked (see below for an overview of how these tokens might related to the project at hand). So far, a large majority of ICOs have been performed on top of the EthereumFootnote ⁴⁴ blockchain (typically using the ERC20 token standardFootnote ⁴⁵ ). Yet, other blockchain solutions exist (such as Stellar, Neo,Footnote ⁴⁶ or WavesFootnote ⁴⁷ to name a few) proposing similar opportunities to token issuers. Though it is not the focus of this paper, compatibility with existing crypto-wallets and the ability to list ICO tokens on crypto-exchanges for secondary trading are key elements for token issuers in choosing a particular blockchain solution.

Regardless of the blockchain being used, we can break down a standard ICO timeline into three different phases: (i) prior to, (ii) during, and (iii) after the contribution period, but before the launch of the project. We briefly describe below the main objectives and considerations of each phase.

1. (i) Prior to the contribution period, a potential token buyer must exercise due diligence in assessing the characteristics of the ICO project, the specificities of the token sale, as well as the success or risk factors attached to it. Additional steps might need to be performed by token issuers for all these token sales which are restricted to accredited investors meeting minimum income or net worth requirements (eg FilecoinFootnote ⁴⁸ ), or those requiring the identification of all buyers in order to comply with Know Your Customers (KYC) and Anti-Money Laundering (AML) regulations. Because of regulatory pressures in many jurisdictions, these practices of “whitelisting” have been used in a variety of ICOs, such as Aventus, Airswap or Polkadot, etc.Footnote ⁴⁹

2. (ii) The contribution period might range from a few seconds (eg Brave’s ICO) to a couple of weeks (eg TheDAO), or even a year (as in the case of EOS token sale). The period can be fixed in time, or capped by a particular threshold. Contributions are usually made through dedicated websites owned and managed by the respective project teams. The modalities and amounts of contributions are determined according to different schemes, whose rules are announced to the public prior to the ICO launch. For instance, some ICOs may rely on specific auction mechanisms determining the closure of the contribution period once a specific cap (ie a preset maximum amount) has been reached (eg GnosisFootnote ⁵⁰ ); others may be cancelled if a floor (ie a preset minimal amount) has not been attained over the contribution period (eg SnipsFootnote ⁵¹ ). Moreover, these schemes might include a variety of incentive mechanisms in order to lure people into purchasing more tokens, at an earlier stage. As we have learned from the economics of competitive bidding,Footnote ⁵² different auction structures might lead to different types of results. It is thus important for token buyers to study and understand the contribution schemes prior to participating in an ICO. Sometimes, however, the auction mechanisms are too complex to be precisely understood by all potential token buyers.Footnote ⁵³ In light of this, specialised ICO firms are emerging with new intermediaries providing technical assistance, advisory and rating services.Footnote ⁵⁴ Contributors who are unfamiliar with cryptocurrency transactions might get assistance through dedicated online forums and chat channels – such as Reddit or Slack – that fundraisers usually open for this specific occasion. Finally, while contributions have mostly been made with bitcoins or ethers so far, a few ICOs also make it possible to contribute in fiat currency (eg through SEPA wires in Europe).Footnote ⁵⁵

3. (iii) Once the contribution period is over, funds (which are typically escrowed by the blockchain-based system that underpins the ICO) are released to those in charge of pursuing the development of the funded project. In many cases, the fundraising teams will try to get the token “listed” on crypto-exchanges to establish a liquid secondary market, allowing token holders to exchange their newly acquired tokens against other crypto-assetsFootnote ⁵⁶ or other listed tokens. Exchanges may also decide to create futures or other types of derivative contracts on the underlying tokens.Footnote ⁵⁷ As a result, it is not uncommon for investors eager to maximise their short-term financial gains to engage in “hit-and-run” (aka “flipping coins”) practices, whereby recently acquired tokens are dumped during the first day/minutes/seconds of their listing, thereby significantly decreasing the market value of these tokens. Such risks should be taken into account when considering whether to participate in an ICO, as the high volatility of the token value might significantly increase the financial risk profile of the token sale. In order to prevent these practices, some ICOs introduced a lock-in period, during which investors are unable to transfer their tokens for a particular amount of time after the end of the contribution period. At the same time, lockups on the side of token issuers may also be required to protect token holders. As in the case of IPOs, a lockup over token issuers essentially acts as a “commitment device to alleviate moral hazard problems”Footnote ⁵⁸ derived from the uncertainty surrounding the actions of the managers (aka token issuers) in the aftermath of the offering – as they may not always be motivated to act in the best interests of shareholders (aka token holders in the case of an ICO). In the context of an IPO, a lockup is intended to reduce the ability of insiders to take advantage of investors, by preventing them from executing an early sale of their stock that would reduce their commitment to the company and ultimately disincentivise them to focus on future share price performance. Similarly, ICO lockups are intended to encourage token issuers to focus on the medium-term success of the project, and to reduce their incentives to engage in short-term “sell and resign” strategies. It is interesting to notice that, while ICOs may use two different forms of lockups (one applied to token issuers to protect investors, and the other applied to investors to protect token issuers against “pumps and dumps” schemes), IPOs generally only rely on the former, and do not prohibit investors from selling their newly purchased securities shortly afterwards. Such a restriction would, in fact, be administratively impossible to enforce in the securities post-trade infrastructure, whereas it is relatively easy to achieve on a blockchain-based platform.

2. Different token types

While each ICO is unique and idiosyncratic in the way the token sale is designed, the proposed project is framed, and potential investors are reached out to, it is nonetheless possible to categorise the tokens issued by these ICOs into a few broad categories. Indeed, any blockchain-based token is designed to give its holder the option to exercise specific digital rights. The nature of these rights ultimately depends on the infrastructural design of the blockchain-based system on which these tokens have been issued, as well as on the function assigned to (or assumed by) these tokens, ie the various products or services that they provide access to. In addition, insofar as they have been listed on cryptocurrency exchanges,Footnote ⁵⁹ ICO tokens can be exchanged against fiat currency or other cryptocurrencies.

Depending on the underlying scheme and protocol design, the rights granted to token holders can be exercised in a variety of ways. Some blockchain-based systems might require tokens to be (i) held (ie kept in the holder’s account for a particular amount of time); (ii) “staked” (ie locked into the token holder’s or a third-party’s account); (iii) “spent” (ie transferred to a third-party account); or (iv) “burnt” (ie destroyed after use). Different rights can be obtained or exercised as a result of these functions. For instance, holding a token representing an asset at a certain date can give rights to future dividends; staking a token into a particular account can grant token holders decision-making power proportional to their token stake; whereas purchasing a product or accessing a service might require the token holders to either transfer or burn a specific amount of tokens.

As a general rule, it is possible to categorise the rights associated to an ICO token into four broad categories: (i) rights of usage; (ii) rights of participation; (iii) rights to profits; and (iv) rights of ownership. These rights are not exclusive to one another, in that the same token could simultaneously grant the holder with the right to use a particular blockchain infrastructure, participate in its governance, and/or receive a share of future dividends.

We provide below an example for each of these four categories:

1. (i) Right of usage: eg Filecoin is a utility token that enables token holders to use a decentralised cloud storage network; the Golem Network enable tokens holders to access and use a decentralised supercomputer aggregating the processing power of many network nodes; Ether enables token holders to deploy computer code on the Ethereum blockchain and/or transact with it; bitcoins – in addition to being used as a means of payment – also entitle the cryptocurrency holders to using the Bitcoin network as a decentralised payment system.Footnote ⁶⁰

2. (ii) Right of participation: eg DAOstack’s reputation tokens enable token holders to vote on specific content or governance proposals, where the influence depends on the number of tokens they hold; whereas holders of the MakerDAO’s governance tokens (MKR) are entitled to vote for the risk management and business logic of the MakerDAO system.

3. (iii) Right to profits: eg Polybius digital bank created the Polybius Dividend Tokens (PLBT) in order to reward its investors. At the end of each financial year, 20% of Polybius’ distributable profit is redistributed to the PLBT holders, according to specific conditions; TheDAOFootnote ⁶¹ tokens gave holders the right to collect shares of profits generated by the decentralised investment fund. It should be noted that TheDAO tokens were also associated with other rights, such as participation and usage rights.

4. (iv) Right of ownership: eg the DGX tokens, issued by Digix, act as a certificate of ownership, which can be redeemed for one gram of gold; Tether (USDT), USD Coin (USDC), and Paxos (PAX) are stable tokensFootnote ⁶² which are – allegedly – backed by an equivalent amount of dollars; the CryptokittiesFootnote ⁶³ are non-fungible tokens on the Ethereum blockchain associated with a digital kitty, owned by whoever holds the corresponding token.

Building upon this typology, it is possible to categorise ICO tokens into the following four main functional categories – taking into account that many tokens are likely to fall within one or more of these categories: (i) utility tokens, giving rights of access to a particular product or service; (ii) participation tokens, giving rights to participate in the governance of a specific project;Footnote ⁶⁴ (iii) investment tokens, giving rights to dividends or other financial returns, based on the profits generated by a particular project; and (iv) asset-backed tokens giving rights of ownership over an underlying asset, be it either a commodity or a specific piece or property. We summarise this typology in Table 1.

Table 1.

A functional token typology

It has to be noted, however, that some ICO tokens might have a plurality of functions. For instance, TheDAO token constitutes a governance token (because it provides voting rights to the token holders), a utility token (because it enables token holder to submit proposals to the decentralised investment fund), and an investment token (in that it provides some dividends to token holders, based on the profits generated by the projects that the fund has invested in). At the same time, tokens which have been designed with a particular function in mind (eg Bitcoin, Polybius or Digix) might end up assuming a different role in the mind of investors, who might be tempted to purchase a token not because of its intrinsic value (ie the product or service it provides access to) but rather because of an expectation of profits resulting from the speculative dynamics found in the secondary market for that token.

With this in mind, it should be clear that it is not possible to reduce any ICO token to a particular legal category by looking only at the technical implementation of the ICO. One should also consider the function assigned to these tokens, the actual use that is made of that token, and the underlying intentions of the investors at the time of purchase. The regulation of ICOs, and the legal qualification of ICOs tokens, may therefore require a much more in-depth analysis of the contingencies at play within these systems. In the following section, we provide an analysis based on the notion of functional equivalence, in order to determine the extent to which any given ICO may fall within the scope of existing financial regulations.

1. The concept of “functional equivalence”

In the late 1990s, the advent of e-commerce posed several challenges to the existing regulatory framework. The digital environment brought many new opportunities for electronic commerce, enabling users to transfer digital content or other virtual goods through the Internet, and pay for these goods via electronic means. But these new opportunities also came along with many uncertainties as to the way in which existing rules and regulations would apply to these electronic transactions.Footnote ⁶⁵ First and foremost is the question of the legal classification of these digital goods: Is the sale of a digital music file the same as the sale of a physical disk? Is it possible to rent a digital movie file in the same way as one can rent a VHS in a store? What does it mean to “own” a digital good? etc. Secondly, e-commerce transactions have given rise to many new contract types, such as the Terms of Uses, the so-called “click-wrap” licences, and other flavours of contracts of adhesions. These contractual transactions are no longer signed on paper after a one-to-one negotiation between the parties, but rather are being executed through electronic means. Contractual provisions are made available on a one-to-many basis, via open platforms, and provided “as-is” without any possibility for negotiation.

In spite of the tangible differences that subsist between traditional paper transactions and electronic transactions, the essence of what a transaction is has remained the same. Even if the medium through which transactions are being performed has changed, from a physical medium to a digital medium, online contracts are functionally identical to offline contracts, at least in their objectives: both are intended to provide evidence to a common agreement, giving rise to specific rights and obligations, to which both parties have indicated their willingness to be legally bound. It naturally follows that electronic contracts should be subject to the same provisions of traditional contract law, and therefore abide by the same rules in terms of contract formation, performance, and remedies. It does not follow, however, that every electronic contract will always and necessarily qualify as a valid contract. Quite to the contrary, like any other contractual agreement, an electronic contract needs to fulfil certain conditions in order to be considered both valid and enforceable – these include offer and acceptance, consideration, informed consent, writing requirement, etc. Each of these conditions needs to be met, regardless of whether parties are contracting in the physical or digital world. Far from having become obsolete, contract law therefore came to be regarded as a crucial body of law capable of accommodating these new contracting practices and regrouping them within the same general category of contracting, in spite of their technical differences.

Yet, given that contract law was elaborated before the advent of Internet and digital technology, many provisions refers to specific legal concepts which are inherently bound to a tangible medium. These include the notions of a “document”, an “original”, or even a “signature” or the act of “writing” – none of which had been properly defined in the digital realm. Hence, in order to properly encompass electronic transactions and other online practices, some adaptations to the law were nonetheless required.Footnote ⁶⁶

For the purposes of e-commerce, a preliminary step in that direction was taken through the United Nations Commissions on International Trade Law (UNCITRAL)’s Model Law on Electronic Commerce (MLEC), aiming to establish a series of principles to give electronic transactions the same level of legal recognition as traditional paper-based transactions, without requiring any extensive legal reform. This was done via the introduction of the principle of functional equivalence, as a means of incorporating electronic transactions in the context of traditional contract law.Footnote ⁶⁷

Of course, the principle of functional equivalence needs to be applied not only at the level of the contract itself, but also at the level of all of its constitutive elements. Indeed, the MLEC stipulates that the “purposes and functions of paper-based requirements may be satisfied with electronic communications, provided certain criteria are met”.Footnote ⁶⁸ Accordingly, to establish functional equivalence, one must identify the appropriate technical features that are necessary to replicate specific paper-based requirements (such as writing, signature, original, etc). For instance, the requirement for a contract to be in “written form” could be satisfied so long as the electronic transactions remained accessible for future reference. Similarly, a digital signature can be regarded as being functionally equivalent to a paper signature to the extent that it can be attributed to a unique person and that it possesses the properties of authenticity, integrity, and nonrepudiation.

Coming back to blockchain technologies, it might be worth investigating whether the same principle of functional equivalence could be applied in the context of ICOs, with a view to identifying, on the one hand, whether some blockchain-based tokens could be regarded as being functionally equivalent to traditional financial instruments, such as stocks or securities, and, on the other hand, whether some tokens might qualify as a new asset-class that should therefore be regulated according to a more sui generis framework.

In a large majority of jurisdictions – with the exception of the US perhaps, whose common law doctrines are sufficiently flexible to cover many of these new fundraising practicesFootnote ⁶⁹ – most of the tokens issued during an ICO do not qualify, strictly speaking, as any existing asset class, and therefore do not fall within the scope of any existing regulatory framework. This is especially true in the case of civil law countries, like France, Germany, or other European countries, which provide a very clear and precise definition of every asset class, along with all of its constitutive elements.Footnote ⁷⁰

Just like electronic contracts have been deemed to be functionally equivalent to traditional paper-based contracts – not just because they share the same purpose, but because they present elements which are themselves equivalent to the constitutive elements of a contract – it is worth investigating whether we could rely on the same concept of functional equivalence in order to get some of the ICO tokens to qualify for instance as securities, shares, stocks or other financial instruments. When analysing the legal aspects of an ICO, it is therefore useful to identify what are the distinctive features of a token, which – in specific circumstances, depending on the technical design and practical use of that token – might qualify as being functionally equivalent to a particular asset class.Footnote ⁷¹

As in the case of e-commerce, where electronic transactions were brought into the realm of traditional contract law without bringing any changes to the law, also in the case of blockchain-based financial instruments, provided that all constitutive elements are met – albeit in a different format than what was originally envisioned under the law – it might be unnecessary to reform existing regulations, or even create new regulations, and rely instead of the principle of functional equivalence in order to ensure that these tokenised assets are brought within the scope of an existing regulatory framework and therefore remain under the purview of the law.

It is, of course, unlikely that all tokens will qualify as an existing asset class, as Sontakke and Ghaisas have pointed out.Footnote ⁷² Some tokens might ultimately not fit into any existing categories because they are actually different both in their nature and function, or simply because they lack some of the core constitutive elements of that class. Other tokens may be regarded as hybrid entities, with regard to existing categories – just as convertible bonds exhibit both equity-like and fixed income features.

In that regard, drawing from the functional classification of token types presented above, it appears that, while asset-based tokens and participation tokens – in their purest form – do not seem to raise any specific issues with regard to securities laws, the situation is much more blurry when an ICO entails the sale of investment tokens and utility tokens, which could to a large extent fall under the umbrella of IPO or crowdfunding regulations. The following analysis will thus focus specifically on the latter two categories of tokens.

2. Investment tokens

The objectives of an IPO are relatively simple: the issuing company is looking to raise capital in public markets. The decision to go public is often many-sided, but it usually reflects two core motivations: (i) access to funding, ie the will of management/existing shareholders to tap into a larger pool of investors and raise substantial amounts of capital that would be difficult to find with private placements; and (ii) liquidity, ie the desire to provide existing shareholders (seed investors, business angels, venture capitalists and so forth) with an easy exit for their investment. It would be an oversimplification to state that IPO investors are essentially buying into IPOs because of the pursuit of financial profit. Yet, if we look at the large institutional investors that usually partake in IPOs, it is clear that they are constrained by fiduciary duties, and that their primary objective is to achieve the best possible financial returns for their shareholders.

As the name suggests, an ICO shares many similarities with an IPO. Both are used as a means to raise public funds for the development of a project or initiative through the sale of a particular asset, and both represent an important opportunity for previous shareholders (or token holders in the case of an ICO) to close their position to achieve a return on investment.

Sometimes, the tokens issued through an ICO might actually represent an equity share or a company stock (investment token). For instance, shares of a company can be “tokenised” and stored on a blockchain-based network, in order to facilitate the trading thereof via a secure, authenticated and immutable ledger. These ICOs are sometimes referred to as Securities Token Offering (STOs), because they are essentially focused on the issuance of securities through a blockchain-based infrastructure. This is precisely what the tZERO platform is intended to achieve, providing a platform that integrates blockchain-based technologies with existing market processes “to reduce settlement time and costs, increase transparency, efficiency and auditability” in capital markets.Footnote ⁷³ As opposed to most ICOs thus far, which generally have tried to avoid their tokens being qualified as a security, the tZERO ICO has actually been characterised by its own team as a “security token sale” – thereby explicitly trying to bring the tZERO token into the realm of securities. What’s more, the platform provides a generalised way for companies to issue their own stocks on a blockchain in order to create a secure and decentralised marketplace for private equity. Although they rely on an entirely new technology, these tokenised shares are, for every practical purpose, equivalent to traditional shares.

Accordingly, whenever a token constitutes a blockchain-based representation of an equity share or stock, it is possible to rely on the doctrine of functional equivalence to argue that the issuance of these tokens should be regulated in exactly the same way as the issuance of traditional securities. Indeed, whether a stock is represented via a piece of paper or via a blockchain-based token does not at all modify the function of that asset.

There are both benefits and drawbacks to such an approach. One the one hand, the inclusion of an ICO within the umbrella of securities law means that token issuers will need to comply with a series of obligations and constraints that they would not have to account for otherwise. On the other hand, falling into regulated waters also provides an additional degree of protection, to the extent that token issuers might be exempted from any additional liability risk, provided that they fulfilled the requirements of all relevant laws and regulations.

In many cases, however, these benefits do not outweigh the costs, and token issuers will therefore try to frame their ICO in such a way as to bring it outside of the scope of securities law. In fact, while the objectives and operations of an IPO are clear and established, those of an ICO are generally more varied and difficult to reduce into a single category.

First of all, while both IPOs and ICOs are both intended to acquire resources for the development of a specific project or initiative, as opposed to IPOs (which are generally done after a company has achieved a sufficient level of maturity), ICOs are generally done at a much earlier stage, to facilitate the bootstrapping of a particular project or initiative. As such, an ICO shares several similarities with traditional crowdfunding practices, since, when it comes to fundraising, both contribute to lowering the costs of acquiring external funds. New startups typically struggle to attract externally-sourced working capital early on in their corporate histories – be it venture capital equity or bank loans, as the work of various scholars has shown.Footnote ⁷⁴ ICOs and other crowdfunding practices enable entrepreneurs and communities to finance new and experimental projects that would otherwise be unable to rely on classical financing channels.

Moreover, in the context of many ICOs, although raising funds is the primary objective, they are often other non-financial considerations that can also be found in crowdfunding. IPOs typically allow corporates that have acquired a certain size and stability of revenues to raise funds from various institutional investors, who will, for the most part, remain passive investors. In contrast, drawing a precise line between investors, consumers or supporters is not always easy – or even feasible – in the context of both ICOs and crowdfunding, where those who provide the funds are also those who want to access the service or use the product they are funding. Although many ICO investors are motivated by the expectations of financial gains and do not bother to engage in the governance of the projects they funded, in many other cases, ICOs participants, just like the many backers of a crowdfunded project, are not just seeking the pursuit of financial profits. They want to have a “say” in the project (not just a “stake”) and are thus more likely to actively contribute to the success of the project, all the more if they “enjoy community benefits that increase their utility”.Footnote ⁷⁵

As such, network effects also play a more crucial role in the context of ICOs than they do in the context of traditional IPOs. Not only do they allow for a small community to potentially grow larger at a very fast pace, they also bring together a community of testers and early adopters who can help the initial project go “viral”. Once the ICO is completed, the token value will grow in line with the size of the community of users. Hence, similarly to crowdfunding, an ICO puts in place a virtuous circle, whereby token holders also become clients or consumers of the products or services they have funded.

Accordingly, although some ICOs can be assimilated to an IPO, the objectives and operation of a majority of them are much closer to that of equity crowdfunding. In line with the doctrine of functional equivalence, it is thus fair to assume that – to the extent that they can comply with the regulatory constraints imposed by crowdfunding regulations – an ICO could benefit from the crowdfunding exemptions that have been introduced both in Europe and in the US, along with many other jurisdictions.

Yet, in order to benefit from these exemptions, token issuers need to comply with the stringent conditions required by crowdfunding regulations, with regard to the limits on the amount of funds that can be raised or invested, on the one hand, and the necessity to operate through a registered intermediary, on the other hand. Indeed, while crowdfunding is usually performed over a centralised digital platform (eg Kickstarter or Indiegogo), in charge of curating, monitoring and, to some extent, managing the projects for which funds are being sought, an ICO is typically done over a decentralised infrastructure enabled by blockchain technology, and does not therefore involve any trusted authority responsible for the curation and supervision of projects.

In light of these constraints, many token issuers have chosen not to confine themselves in the realm of crowdfunding, and have been trying instead to escape from the scope of regulation by highlighting the fact that – despite the functional equivalence between these different fundraising practices (with regard to both IPOs and crowdfunding) – there are also important differences that may place ICOs outside of regulated waters.

Perhaps the most important difference between ICOs and equity crowdfunding or IPOs is that, because a blockchain-based infrastructure makes it possible to raise funds for projects that do not have a corporate structure,Footnote ⁷⁶ in many cases, the type of assets that are being offered to the public through an ICO are significantly different from those of an IPO. An IPO is concerned with the issuance of a company’s stock that will dilute the overall ownership of the company. It typically implies a dilution of shareholding rights (and hence of corporate control) for existing shareholders – unless they are able to acquire newly issued shares in proportion to their existing stakes. Because the bearer of a company’s shares usually gets both economic and voting rights, by diluting existing shareholders, an IPO dilutes the existing shareholders’ control over the company, as well as their economic rights over the dividends to come.

An ICO, instead, generally refers to the issuance of blockchain-based tokens that do not necessarily have a direct connection with a company – except where the tokens represent actual shares in a company (eg in the case of an STO). As a general rule, while there is often a company involved with the project or initiative that will be funded through the ICO, the tokens are issued through a foundation that will be in charge of collecting the proceedings. In the most extreme cases, funds are sent directly to a cryptocurrency account controlled by a handful of people, without any legal entity. Hence, regardless of whether or not there is a corporate entity backing the project, token issuance does not actually dilute the ownership of a legal structure. There is generally no dilutive effect in terms both economic and voting rights, because the tokens issued are independent from the actual shares of a company (except in the case of security tokens).

However, although there is no formal or corporate dilution, it should be noted that, in practice, an ICO might also lead to a redistribution of both voting and economic power among investors, to the extent that tokens are used as a proxy to an economic interest and decision-making power. Hence, even though the form changes, the function – once again – remains the same.

TheDAOFootnote ⁷⁷ represents perhaps the most notorious example of how a blockchain-based initiative without any corporate entity ultimately operates like a traditional corporation. TheDAO was a decentralised organisation acting as an investor-directed venture capital fund, which initiated its token sale in May 2016. Even though it had no legal entity, TheDAO was designed from the start to mimic – and allegedly improve – corporate governance. Participants who acquired TheDAO’s tokens automatically acquired the ability to vote on the projects that TheDAO would fund (proportional to each participant’s stake), and the right to collect a portion of the profits generated by previously funded projects.Footnote ⁷⁸ Thus, despite TheDAO not being directly backed by any corporate structure, participants in TheDAO’s ICO had similar expectations to standard IPO investors: acquiring some degree of control over the direction of the project and TheDAO’s investment decisions (decision-making power) and obtaining a share of its future profits (economic interest).

The similarity of TheDAO tokens with traditional securities did not pass unobserved. On 25 July 2017, the US SEC issued an investigative report stipulating that digital assets offered and sold by “virtual organisations” are subject to the requirements of the federal securities laws to the extent that they de facto operate as securities.Footnote ⁷⁹ While, in the end, the agency decided not to bring retroactive charges in this instance (because TheDAO had already came to an end due to a technical glitch), the report sent a clear warning to current and future tokens issuers that their activities might fall within the scope of SEC regulations.

3. Utility tokens

While many ICOs have been framed or perceived as a form of investment by both token issuers and token holders, and are therefore likely to qualify as securities issuances, many people (especially token issuers) believe that, regardless of the amount of funds to be raised, ICOs should remain outside the regulatory framework of IPOs – whose expensive formalities and draconian regulations might stifle innovation in the blockchain space.

Hence, in order to escape from the doctrine of functional equivalence, token issuers have been experimenting with alternative ways of framing their tokens as something that is functionally not equivalent to a security. This is what motivated the narrative towards the issuance of “utility tokens” – ie tokens that represent mere access to a particular product or service, rather than a speculative investment. Inspired by the different types of crowdfunding, token issuers argue that because of the intrinsic functionality of these tokens, the issuance of utility tokens to the public at large should merely be regarded as a standard “pre-sale” contract (as opposed to an investment contract), which should therefore not fall under the umbrella of securities regulations.

As described in the previous section, traditional crowdfunding typically takes the form of an equity stake, a loan, a donation, or a reward-based pre-orderFootnote ⁸⁰ but only the former two are regarded as regulated activities under financial regulations.

Blockchain-based tokens might acquire a different legal status depending on the token design and the intended or perceived function of these tokens. At its core, any ICO that does not entail the sale of an equity share or a company stock (as in the case of STOs) leverages the opportunities of blockchain technology to collect public funds for the development of a particular project or initiative, and could therefore be regarded as a new form of reward-based crowdfunding. Indeed, although not formally presented as such, the tokens issued through an ICO generally represent a variety of rights (present or future) that can be assimilated to those traditionally granted via reward-based crowdfunding.

Yet, regardless of the narrative used by token issuers, it is important to assess whether utility tokens – in spite of their distinct functionality – could nonetheless qualify as a security, to the extent that they fall within the broader category of an investment contract. Token issuers might well try to design their ICO in such a way that their token falls outside of any existing regulated category, but they cannot run afoul of security regulations so easily.

For instance, in the US jurisdiction, many token issuers have intentionally sought to fail the Howey test, by making sure that at least one of the four conditions is not met.Footnote ⁸¹ However, since the US SEC has endorsed the principle of “substance over form”,Footnote ⁸² it has become clear that one cannot run afoul of SEC regulations by simply stepping aside from a formal requirement: a token will be regarded as a regulated security if the substantive function of that token remains that of an investment contract.

The only way to assess the substantive function of a token is to investigate the intentions of the people purchasing these tokens. While the backers of a reward-based crowdfunding project are mostly interested in the practical implementation of the projects they are funding – in order to directly benefit from them, as opposed to make money out of it – investors in an ICO have more ambivalent motivations: in addition to their interests in seeing the project come to life, they are also (or mostly) interested in acquiring a particular set of tokens, whose value might fluctuate over time – with a view to generate financial gains by trading these tokens on a secondary market.

This issue was clearly illustrated by the Munchee case, which represents an important precedent for all token issuers claiming that their tokens are primarily designed as a utility token when, in fact, investors had “reasonable belief that their investment in tokens could generate a return on their investment”.Footnote ⁸³ Munchee Inc was a California-based company that intended to launch an ICO to fund its blockchain-based food review service. However the SEC found that – despite the utility ascribed to its tokens – public issuance of these tokens would constitute “unregistered securities offers and sales”;Footnote ⁸⁴ the company had to terminate the ICO and refund investors before any tokens were issued.

Moreover, it has been shown that, even if blockchain-based tokens do not qualify as a security at the time of issuance, their qualification can always be re-evaluated ex post by the SEC, who might declare that these tokens have eventually become a security.Footnote ⁸⁵ As a result, many token issuers – by fear of falling within the scope of the Howey test – have excluded US operations and US persons as potential participants to their ICOs.

With this in mind, it becomes clear that any attempt by token holders to escape from a particular regulatory framework (and securities laws in particular) by simply describing the token as a “utility token” and assigning a specific utility value to it (eg a right of usage or a right of participation) will not be sufficient to justify a regulatory exemption. Indeed, the doctrine of functional equivalence – which requires looking at the policy objectives that motivated the creations of specific rules and regulations, to understand whether these rules have reason to apply into this new context – is sufficiently broad to catch not only investment tokens, but also utility tokens that ultimately assume the same function as a security.

1. Principle-based regulation

When contemplating if and how to regulate ICOs, it is interesting to look back at the lessons from the last financial crisis. It seems quite clear, in retrospect, that an important factor leading to the crisis was an unprecedented degree of complexity in some financial products that made it difficult for some market participants to clearly understand the overall degree of systemic risk at the macroeconomic level on the one hand, and the particular features of the products they were buying into, at the microeconomic level, on the other hand.

This degree of complexity was essentially achieved by a string of financial innovations. As Awrey puts it,

Of course, regulating a complex and rapidly changing technology is not easy; regulations have to constantly adapt and adjust their rules to the new technological landscape.Footnote ⁸⁷ Rules that try to be overly specific for the sake of clarity and compliance, will soon have to change because of technological advances.

This is where principles-based regulatory frameworks come in handy. In a nutshell, a principles-based regulation (as opposed to a rules-based one) mainly focuses on the principles that should be followed in any relevant situation, instead of trying to establish a set of rules that should address all possible scenarios. This approach to regulation has the advantage of flexibility, while the drawback is that honest or ill-intentioned individuals may invoke different interpretations of the principles at work to justify their own courses of action.

Without revisiting the history of the “rules vs principles” dialectic,Footnote ⁸⁸ it seems fair to say that, while principles-based regimes were pursued by the UK Financial Services Authority (FSA), the Australian Securities and Investment Commission (ASIC) and other jurisdictions (most notably Canada before the 2008 crisis), this approach was thereafter criticised as having opened the door for various abuses due to its perceived lack of precision. Awrey (2011) fought back these criticisms, by showing that a principles-based regulation could be particularly suitable to deal with over-the-counter (OTC) derivatives markets, where asymmetries of information and agency problems are pervasive. In Awrey’s words, if “modern financial markets are characterized by complexity, seemingly perpetual innovation, chronic asymmetries of information and expertise, and pervasive agency costs”, prescriptive, rules-based approaches toward financial regulation have thus far “proven inadequate to [the] task” and principle-based regulation has the potential to “overcome these challenges and, in the process, generate more nuanced, responsive, durable, and effective regulation”.

Accordingly, despite the acceptable criticism of the leeway that a principles-based regulatory approach may give to fraudsters, we think it is worth considering this general paradigm for dealing with ICOs – especially when it comes to risks.Footnote ⁸⁹ With this in mind, we now turn to a comparison of the risks raised by both IPOs and ICOs, as we believe it is particularly relevant to the debate of how to best regulate these emerging fundraising practices.

2. Comparing risks between IPOs and ICOs

Academic literature has already analysed the various risk factors of IPOs and their link to financial returns and long-term performance. For instance, Abdou and Dicle have found that “venture capitalists and investment bankers have a significant and economic effect on the number of risk factors reported in the prospectus”,Footnote ⁹⁰ while Bhabra and Pettway have shown that prospectus information is “more useful to predict survival/failure compared to subsequent equity offerings or acquisitions”.Footnote ⁹¹ As many of the formalities required by securities law are driven by the motivation to properly inform potential investors, the risks entailed by an offering need to be properly accounted for by the quantitative and qualitative information provided in the offering prospectus.

Given the described parallelism between ICOs and IPOs, it is natural to think that they should entail common risk factors.Footnote ⁹² Whether they come from an IPO or an ICO, similar risks should be treated in a similar manner. Hence, if the risks posed by an ICO are equivalent, in degree and in kind, to those posed by an IPO, there are good reasons to believe that the two fundraising practices – albeit different in their objectives and format – should nonetheless be subject to a similar regulatory framework. Indeed, from a “risk equivalence” perspective, similar risks shall give rise to similar regulatory constraints, regardless of format or the declared function of these token sales.

Yet, there are important differences between an ICO and a more traditional fundraising operation, which might significantly affect the risk-profile of the projects funded via either of these methods. In order to better understand the differences and similarities, this section will provide an overview of the common risk factors between IPOs and ICOs, and then provide a more detailed analysis of the risks that are idiosyncratic to an ICO.

1. Blockchain technology as regulatory technology

Just as in the case of e-commerce, establishing functional equivalence in the context of an ICO also requires understanding the underlying reasons and regulatory objectives of specific legal provisions, in order to assess whether they can be fulfilled by technical means. In other words, the question is whether specific technological features, enabled by blockchain technology, could satisfy some of the requirements of existing securities law by reducing some of the risks that the regulations are meant to address.

The particularity of blockchain technologies is that, as opposed to traditional means of security issuance, which are ultimately based on contractual agreements and paper-based formalities, ICOs are done via a technical infrastructure which is inherently “programmable” and can therefore incorporate a variety of technical features that could help achieve some of the regulatory objectives enshrined in specific provisions of security laws.Footnote ¹²⁶ Blockchain technology can thus provide an automated means of making sure that the public offering process complies with the principles described above, and that the process incorporates all features and functionalities required in existing regulations to protect token issuers and investors from potential risks.Footnote ¹²⁷

Blockchains and smart contracts make it possible to implement, at reasonable costs, technical features that were difficult to implement in a traditional centralised setting. For instance, in order to protect investors, the smart contract governing an ICO could incorporate a series of “technical guarantees” through a series of technological constraints designed to reduce the degree of risk that would otherwise need to be incurred by investors.

In such case, it would seem fair to assume that this particular token sale could benefit from a lower regulatory burden, because risk has been mitigated by technological (rather than regulatory) constraints. Even in the case of an STO, the issuance of security tokens via a blockchain-based infrastructure that would provide additional guarantees to investors, particularly as to the way in which raised funds can be used, could benefit from a more lenient regulatory framework than traditional IPOs, because – in spite of their functional equivalence – they do not raise the same typology of risks.

Thanks to smart contracts, ICOs bear the potential of providing more refined control mechanisms over the collected funds, while lowering compliance costs and decreasing investors’ risks. For instance, if a public company with quarterly filings were to announce bad results, individual investors would typically have to bear the full impact of this bad news. A properly designed ICO smart contract could mitigate some of these risks. Instead of giving a blank cheque to the company, and seeing later what comes out of it at every public filing, the ICO smart contract could lock funds into an escrow smart contract and gradually make the investors’ funds available to the fundraising according to a predefined roadmap, controlled by the achievement of sequential milestones. This would make it possible for investors who purchased tokens during the token sale to redeem these tokens in order to recoup all or part of their investment, at specific time intervals, if they considered that the project did not meet some of the milestones that it had committed to,Footnote ¹²⁸ or if they collectively believed the funds were not properly used, but not simply because they no longer wanted to support the project. In this way, both the fundraising team and the investors can rest assured that they will not be disappointed: if the team does not achieve its deliverables, investors will be able to retract their investment, but, as long as the milestones are achieved, the team will be able to rely on a steady stream of payments, without having to engage in additional fundraising rounds.Footnote ¹²⁹

Indeed, it was already possible to do this before with managed escrow accounts (a concept that precedes the digital age), and corporate entities raising public money in an IPO have always been held accountable for how they use the proceeds (for instance, through the investigations of research analysts). Yet, smart contracts can provide greater granularity to this oversight process, by both automating and simplifying it. For example, in order to protect token issuers, ICOs could temporarily disable the “send function” associated with the tokens being sold, thereby locking these tokens for a specific period of time, in order to ensure that the management team and the investors who purchase these tokens are actually aligned with the long-term success of the projects, and will be unable to engage into speculative practices such as “pump and dump”. This seemingly innocuous feature goes a long way and may have profound implications on financial markets and their regulation in the long term.

In the longer term, one could also imagine that a multi-featured token will act as a smart security,Footnote ¹³⁰ eg one where the decision to convert a debt-like feature into an equity-like feature can be done automatically (ie this would be equivalent to having convertible bonds with automated conversion features, or American options with embedded automated exercise patterns). Although the idea of a smart security is still prospective and has no real incarnation yet in financial markets, we suspect that ICOs, smart contracts, and smart securities, are likely to have a deep impact on securities laws in the future.

Finally, while securities law requires extensive formalities and reporting obligations, as a means of ensuring that the money that has been invested in the project is being used properly, the transparency inherent in blockchain technology, along with the programmability of the underlying technological infrastructure, makes it possible to achieve real-time auditing and automatic reporting. This decreases the need for parties to engage in traditional audits and reporting, which are generally cost prohibitive for many small players.Footnote ¹³¹ Alternatively, the management team could be required to record, on a blockchain, every expense, digital currency transaction or exchange of digital currency into fiat currency, with the specific line of business that the transaction is associated with – thereby facilitating the work of auditors and inspectors through the creation of a transparent, tamper-resistant and non-repudiable audit trail.

Another possibility is to rely on specific technological arrangements in order to ensure that the tokens issued through an ICO do not fall within the qualification of an investment contract, and therefore do not need to comply with securities law. This could be achieved, for instance, by limiting the ICO tokens’ speculative potential. A smart contract could, indeed, be designed to offer a constant supply of tokens at a particular price, regardless of the market price. Hence, if the market price were lower than that of the smart contract, people would purchase tokens on the secondary market. But if the market price were to become higher, people would then have the opportunity to purchase tokens directly from the smart contract – thereby increasing the overall token supply, and thus progressively reducing the market price.

Such a utility token model that does not come with a fixed quantity of tokens would contribute to drastically reducing the speculative dynamics of the token sale, which would therefore be more likely to fall within the category of a pre-sale contract (being functionally equivalent to reward-based crowdfunding), and potentially escape from the scope of traditional securities regulations. Of course, a corollary drawback would be that reducing speculative opportunities over the token’s value might also discourage some of the investors in contributing to the ICO.

Ultimately, it is up to the fundraising team to decide what is the most effective strategy to follow. If the team only needs a few hundred thousand dollars, they can fit within the crowdfunding exemption. Otherwise, they will have to choose between either complying with the broad range of formalities and regulatory constraints imposed by IPO regulations, or rather submit themselves (and the investors) to specific technological and economic constraints, automatically enforced by the underlying blockchain infrastructure.

Of course, given the relative immaturity of blockchain technologies, it is still difficult, for the time being, to understand precisely which technological features could be regarded as being functionally equivalent to specific provisions of securities law, especially with regard to systemic risk and investor protection. Market players have just begun to experiment with these new technologies, and more time is required to ascertain – from an empirical perspective – whether a particular feature could, indeed, satisfy the same regulatory objectives enshrined into securities laws.

2. Private regulation and standardisation

One of the main issues with the regulation of ICOs is that it is still too early for regulators to establish rules that require token issuers to abide by certain principles or to implement specific technical guarantees into their ICOs models. Indeed, given the rapid pace of technological progress, it has become increasingly difficult for governments and regulatory authorities to keep pace with these new technological developments. The lack of expertise with regard to the technical aspects of blockchain technologies further complicates the task of coming up with proper regulations that may accommodate these new technologies. As a result, instead of trying to elaborate a top-down regulatory mechanism for ICOs, it might be more appropriate for governments to delegate the task to the private sector, eg by devolving some of their regulatory functions to large international standard-setting organisations.

This growing trend towards private regulation has already been observable for a while. As described by Tim Bühte and Walter Mattli in their book The New Global Rulers, coregulation via standard-setting organisations is becoming an appealing answer to governance issues in fast moving and complex technology driven areas.Footnote ¹³² While it is still early to think about the establishment of standards for ICOs, we are already seeing the development of informal practices within the blockchain ecosystem, as many companies proposing ICOs are trying to converge towards a set of best practices that are more in line with the basic concerns of regulators.

This point was addressed in a recent report by Smith & Crown,Footnote ¹³³ where it was suggested that the blockchain community co-develop a set of best practices or guidelines for token issuers, in order to avoid an excessively strict regulatory response from regulators – increasingly concerned with the growing amounts of fraudulent or illegitimate token sales that could be launched every day. Most importantly, these best practices could contribute to helping regulators understand how the technical guarantees enabled by blockchain technologies could not only facilitate these new fundraising practices, but also to a large extent ensure that investors’ interests and consumer protection regulations are respected. This opens the possibility of translating existing regulatory aspects into technological blocks, making sure that existing legal requirements are enforced through technological checks and balances.

As time goes by, and as outcomes can be more clearly and empirically assessed, standard setting organisations could eventually incorporate these best practices and technological guarantees into more structured and standardised frameworks. While most of these standard frameworks merely operate on a voluntary (opt in) basis, governments could nonetheless provide incentives for the industry to adopt these standards, so as to ensure a broader harmonisation and more widespread adoption of these practices.

In line with the principle of functional equivalence, governments could, for instance, recognise some of these technical standards as providing the same functions as existing laws or regulations. This particular interpretation of “functional equivalence” is important as it would enable companies eager to engage into an ICO to check with regulators that their offerings comply with existing regulations. If their technical solutions qualify as being functionally equivalent to specific rules or regulations, parties could potentially benefit from a more lenient regulatory framework, in that they may no longer be required to comply with all of the requirements needed to register securities. In particular, parties who agree to implement these technical guarantees into their ICO models could forgo some of the formalities and reporting obligations required under the law, whose functions can more easily be fulfilled via technological means. Indeed, so long as the underlying regulatory objectives are satisfied, it is largely irrelevant whether these are satisfied through technological or other means. What matters is that, in the end, token sales are done in such a way as to comply with the law, by reducing the degree of risks that these new fundraising practices entail. By recognising the functional equivalence of specific technical guarantees, governments could ultimately strike a balance between the need to protect investors and enabling many new industries to develop.