Appcoins and the Perils of Crowd Funding

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Crowdfunding has been a popular method of raising money for start-ups and projects since the mid-2000’s. In recent years, many have begun to look to the blockchain to further revolutionize this method of raising money. The Blockchain allows projects to create and distribute their own tokens and coins in exchange for investment. Some tokens represent tiered rewards, similar to existing crowdfunding, sites such as Kickstarter. These tokens are then redeemed at the conclusion of the funding period. The benefit of blockchain assets is that they can be traded or sold during the interim, allowing rewards to be transferred to someone other than the person who made the investment.

Questions of legality have been raised concerning some aspects of Blockchain crowdfunding, however. Legal professionals are specifically wary of Appcoins, which may offer equity in a project or company, or are offered as debt. Such an offer may constitute ‘securities trading’; an act which is highly regulated and enforced by the SEC.

Securities trading is defined as a trade which involves an investment of money or other tangible or definable consideration used in a common enterprise with a reasonable expectation of profits to be derived primarily from the entrepreneurial or managerial efforts of others. Without the proper permission from the SEC, it is illegal to perform such a sale to residents of the US. Other countries have their own laws, which may be similar. In addition to the questionable trading of securities, appcoins may (in some cases) also be considered money transfer. Operating as a money transmitter without being properly licensed and registered has, in recently years, shut off the lights at a number of bitcoin-related companies and private vendors.

Some crowdfunded blockchain projects, such as ‘GetGems Messenger’, took steps early on to ensure that they were operating their sales legally, by requiring the acknowledgement of their Terms of Sale by investors. In these agreements, they specify that investment is not in exchange for any form of equity, or promise of financial reward.

Projects offering traditional, deliverable, rewards may have little to fear if they look to those who came before them for guidance. Kickstarter, IndieGoGo, and similar sites have clearly outlined what can, and what can not be offered as backer rewards, as well as what kind of projects can and can not be funded on their sites. In many cases, these rules are in place to absolve the platforms of potential legal infringement. Some sites, such as Crowdfunder, have taken advantage of a SEC ruling from 2012, which allowed properly regulated sites to act as intermediaries for equity trading. The key though is that these projects are hosted by a site that has approval to do so, whereas individuals offering blockchain-based equity for self-hosted projects likely would not. Hopefully, blockchain-based crowdfunding platforms will step up to the outlined legal requirements, and will be able to allow equities trading to take place, under the same SEC ruling.

Given that crowdfunding with the Blockchain is still new territory, interested parties should always consult legal advice before initiating their sales. With the proper guidance, the Blockchain will help to fund many worthy projects for years to come.