Crowdfunding Token Sales, the New ICO?

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The European Union is to raise the crowdfunding exemption from accredited investors rules to €8 million ($9.35 million) from the current €5 million.

That means any project that wants to raise up to around $10 million needs not ask for any permission or register with any agency if they are based in the European Union.

That includes Britain, which will probably keep this rule even after they leave EU. So if a CryptoKitties like project wanted to play it safe and not deal with unelected bureaucrats potentially making new laws by interpreting old ones as the Securities and Exchanges Commission (SEC) arguably did, they could just comply with the crowdfunding regulations for the token sale.

In addition to that allowing for fund raising, there are some yummy tax brakes in UK which would make any investor salivate.

One of them is called the Enterprise Investment Scheme (EIS) tax breaks which is described in some detail as follows:

“You get income tax relief of 30 per cent. So if you invest £10,000 in a company that is eligible for EIS, you can knock £3,000 off your income tax bill in the year that you invest.

You’ll pay no capital gains tax on any profits you make from an EIS investment. So if you invest £10,000 and five years later sell your shares for £20,000, you’ll get the full benefit of the £10,000 profit, saving you at least £1,800.

If you make a loss on your investment, you can offset that loss against income tax… There’s no inheritance tax to pay on shares.”

America is keeping all this candy for the very rich and banks under “investors protection” justifications which some call investors’ prohibition.

Accredited investors rules require one to have $200,000 in yearly income or $1 million in net worth for which only 0.5% of all households in America qualify.

That means only the very rich can invest in promising start-ups that might grow into global household brands like Google or Facebook during the early years when there’s most of the stupendous growth potential or as Fred Wilson, a VC, calls it when there’s the potential for “unnatural returns.”

That limitation does not apply if the start-up is raising up to $1 million under US law, but under EU law it will rise to nearly $10 million.

So can this be a loophole of sorts to the Securities Act 1933 restrictions on investing in non-publicly traded companies?

Arguably, if a company is complying with EU laws, US can not say they are in breach of their laws because that would in effect balkanize trade, double more so when it is an online based project.

Plus, there’s no justification as if EU is working fine under that rule, there is no reason why US should have a lower cap.

Congress therefore may eventually get around to raising the cap, but they’re currently busy with Russians and babies so we may have to wait some time until Trump removes two regulations for every new one as he promised or starts sorting out the third world airports as he called them.

For now, ICOs will have to just go around and shop for the most appropriate jurisdiction, with Europe being a decent place to settle as US would probably have to acknowledge their laws.

In US, they can try Regulation A, but that’s a pretty long affair requiring among other things the submission of “an offering memorandum to the SEC for approval for distribution to offering participants. Non-accredited investors may participate in a Reg A+ offering.”

How long that approval process would take we don’t know but we should think if companies really start using it, it would probably take years.

Moreover, that’s more appropriate for an established company that wants to test the waters before fully IPO-ing, rather than a start-up which SEC would probably turn away.

For projects that are more like the ICOs we have seen, EU’s crowdfunding rules could easily be used without requiring any permission from anyone.

Andrew Adcock, Chief Marketing Officer at a UK based crowdfunding platform called Crowd for Angels, says token sales are not regulated in UK, but if FCA took the same view as SEC, Adcock says:

“If in theory the FCA did state that they are a security offering it would fall under financial promotion rules. Thus anything above 5million euros would trigger prospectus rules

Investors aren’t limited to an amount, but remember for equity a close relative there are rules around tax relief laws…

With an Equity raise, companies can seek £150k SEIS & £5million EIS with an individual investor allowed to contribute a maximum of £100k and £1million respectively, should they wish to take advantage of this relief.”

Themselves they are aiming to raise £50 million (£4.25 million of it through their platform) in a tokenized debt offering, one of the first such offering in the world as far as we are aware, with their FCA regulated platform not limiting itself to accredited investors so allowing for the application of crowdfunding rules with individuals able to invest 10% of their net worth excluding property.

UK’s FCA is moreover holding public consultations regarding how regulations should apply to ICOs and/or tokens specifically, with EU likewise considering the landscape.

Making their environment highly competitive and perhaps very appealing for projects in this space as millennials try and open the barriers to wealth creation.

Copyrights Trustnodes.com

 

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