ICO | Initial Coin Offerings

initial coin offering

Short Answer:

ICOs operate in a legal gray area. They must register with the SEC as digital asset securities or pass the Howey test, or risk failing to meet the criteria for investment contracts.

Similar to an Initial Public Offering (IPO), an Initial Coin Offering (ICO) (or token offering) is the way funds are raised for new blockchain based startup cryptocurrency offerings. Since cryptocurrency is decentralized, nearly anyone can launch an ICO given the use of the right technology. To create an ICO, you would create a white paper detailing how the coin would work, ask for funding in either crypto or fiat money from people, and in return send them the coin or token you’ve created. Should this initial coin you created gain high circulation, then the value of the coin will increase. As the creator of the coin, you have now created a new cryptocurrency that could rival other ICOs like Ethereum. When creating an ICO there are various legal documents that need to be reviewed and compliant with applicable laws and regulations.


How Are Initial Coin Offers Created?

Anyone can create an ICO with the right team and technology in place. Below are common steps taken to create an ICO.


1. Ideation

Once you have an idea for your startup and are ready to raise funds through an ICO, you need to ensure the project you want to fund and the token for sale make an investment in your ICO attractive.

2. Write a White Paper

When you’re ready to dive into the ICO landscape, you’ll need to write a white paper that documents everything your potential investors will need to know about the project. The white paper will detail market analysis, business strategy, goals, technical architecture, information on the coin and how it will be distributed, legal issues, a description of your team, a project roadmap, an allocation of funds, privacy terms, FAQs, and much more. The white paper should provide a comprehensive overview of the project and provide a thorough understanding of complex legal concepts, policies, or regulations, and offer insights to stakeholders, policymakers, or the general public.

When drafting a white paper, it is crucial to ensure accuracy, clarity, and objectivity in the legal language used. The document should present a logical structure, including an introduction, background information, a detailed analysis of the legal issues, supporting evidence, arguments, and a conclusion or recommended course of action.

Furthermore, a white paper should adhere to the legal principles of transparency, accountability, and compliance with applicable laws and regulations. It should properly cite legal authorities, precedents, statutes, and other relevant legal sources to support its claims and provide a strong legal foundation for the proposed recommendations or conclusions.

3. Create a Token and Smart Contract

The next steps involve the development of a token. This can be accomplished by either creating a proprietary blockchain or utilizing an existing blockchain through forking, upon which the token’s programming can be implemented. Additionally, it is imperative to establish and finalize a smart contract. This smart contract, residing on the blockchain, facilitates automated transactions of the token between buyers and sellers, and is governed by pre-encoded rules.

During the process of token development, it is essential to allocate a budget for the token’s creation and distribution. This necessitates identifying the necessary funds to be raised through an ICO, considering options such as hard caps or uncapped approaches with fixed rates. Furthermore, the option of conducting an ICO pre-sale to generate enthusiasm and support should be evaluated. Additionally, it is important to allocate a specific number of tokens to the founding and developmental teams involved in the project.

From a legal standpoint, it is crucial to ensure compliance with relevant laws, regulations, and securities requirements throughout the process of token development, ICO fundraising, and distribution. It is recommended to consult legal professionals with expertise in securities law and regulatory compliance to navigate the legal complexities associated with token development, fundraising, and allocation of tokens to various stakeholders.

4. Legal

If you are offering an ICO that does not involve a security token, it is crucial to demonstrate evidence that your intention is not to defraud investors or engage in any fraudulent activities that may result in financial loss. To achieve this, it is imperative to obtain legal guidance to prepare the necessary documents and take measures required to ensure compliance of your ICO with applicable regional and international laws, regulations, and best practices.

Seeking legal counsel is essential to determine the specific legal documents that need to be prepared and provided to establish the legitimacy and transparency of your ICO. These documents may vary depending on the jurisdiction and regulatory framework in which the ICO operates. However, some common legal documents that may be relevant include:

  • Terms and Conditions
  • Privacy Policy
  • White Paper
  • Additional documents listed below.

It is crucial to work closely with legal professionals experienced in securities law, regulatory compliance, and cryptocurrency matters to ensure that all necessary legal documents are properly prepared and adhered to, mitigating potential legal risks and promoting investor confidence in the ICO.

5. Marketing

To ensure visibility and attract investments for your ICO, it is necessary to undertake extensive marketing efforts. The marketing strategy for your ICO should encompass various elements, including the establishment of a comprehensive website. This website should provide essential information such as the white paper, ICO specifics, descriptions of the product and project, links to company social media accounts, product design details, and roadmaps.

In addition to the website, there are several other avenues that can be utilized to enhance engagement and generate interest in the ICO project. These include creating dedicated profiles on relevant social media platforms specifically for the ICO or project, actively participating in discussions and engaging with the community on these social media channels. Moreover, strategic advertising campaigns on appropriate platforms can help to increase exposure. It is also beneficial to cultivate positive public relations (PR) for the ICO, both through owned channels and earned media coverage. Engaging and promoting the ICO on cryptocurrency forums can expand its reach and generate further interest.

Furthermore, it is advisable to employ strategies such as distributing newsletters and implementing targeted email campaigns to effectively communicate with potential investors and stakeholders. These efforts, combined with other marketing techniques, can contribute to raising awareness, building credibility, and attracting investments for the ICO.

6. Launch

Once you have the technical infrastructure in place and legal requirements resolved, you will be ready to launch your ICO.

Initial Coin Offering Use Cases

Initial Coin Offerings ultimately use a crowdfunding based model in the crypto world that helps entrepreneurs and startup businesses raise capital for business development and growth. The investors who get in on the ground floor of a successful ICO will benefit in the long run. Examples of successful ICOs include:


  • Banco – Bancor enables crypto investors to participate in an open-source financial marketplace. Bancor’s ICO generated over $150MM in digital currency.
  • Ethereum – Ethereum powers the cryptocurrency ether (ETH) and decentralized applications. Ethereum’s ICO generated over $17MM in digital currency.
  • Filecoin – Filecoin is a decentralized data storage network secured by blockchain technology. Users can access servers and share storages in exchange for Filecoins. Filecoin’s ICO generated over $250MM in digital currency.
  • NEO – NEO utilizes decentralized commerce and smart contracts. NEO’s ICO generated for nearly $71MM in digital currency.
  • Sirin Labs – Sirin Labs created a blockchain smartphone enabling secure crypto transactions. Sirin Labs’ ICO generated over $155MM in digital currency.
  • Sorj – Sorj is cloud storage decentralized. Instead of storing files in private on-prem data centers, Sorj encrypts files and stores data in a global cloud network. Sorj’s ICO generated $30MM in a week in digital currency.

What Are The Advantages To An Initial Coin Offering?

Initial Coin Offerings are high-risk and high reward. Below are the advantages to creating an ICO and making a high-risk investment in ICOs.


Startup ICOs stand to gain significant benefits if their digital currency achieves widespread circulation. When an investor buys tokens during an ICO, it is important to note that they do not acquire any shares or ownership rights in the company conducting the ICO. As a result, the entrepreneur leading the ICO maintains complete ownership and equity in their company, with no transfer or relinquishment of ownership rights to the participating investors. It is crucial to establish and clearly communicate this legal distinction to potential investors to ensure transparency and manage expectations regarding the nature of their investment in the ICO.


Following the launch of an ICO, newly issued tokens can immediately be sold on the crypto market. As a result, this allows individuals worldwide, possessing the necessary digital currency such as Bitcoin or Ethereum, to instantly acquire the ICO tokens. This decentralized nature of ICO trading offers a greater level of accessibility and liquidity.

In contrast, when an investor participates in an IPO, the investment process typically involves wire transfers and the involvement of intermediaries such as banks or financial institutions. As IPOs constitute a more intermediary-driven process, there exists a potential risk that the bank or financial institution could freeze the investor’s assets as a precautionary measure aimed to ensure compliance with legal and regulatory requirements and protect against fraudulent activities. Consequently, investors need to consider the potential asset freezing risk associated with the traditional IPO process, which may not be applicable to the decentralized and direct trading nature of ICOs.


The inherent blockchain-based nature of an Initial Coin Offering (ICO) brings transparency and visibility to all investors involved. The decentralized and immutable nature of the blockchain allows investors to have access to real-time information and closely monitor the daily progress of the ICO. This heightened transparency empowers investors to scrutinize the ICO’s activities, ensuring compliance with applicable laws and regulations, and detect any potential fraudulent or suspicious activities associated with the investment. In case of any suspicious activity, investors can report such instances to relevant regulatory authorities, enforcing legal accountability and potentially mitigating harm to investors.

High Liquidity

Cryptocurrencies, being intangible assets, enable rapid transactions while maintaining a significant portion of their market value. Unlike traditional tangible goods or assets, cryptocurrencies exist solely in digital form and do not involve physical exchange.

Due to their digital nature, the transfer of ownership and value in cryptocurrency transactions can occur swiftly, facilitated by the use of blockchain technology and decentralized platforms. This inherent speed and efficiency in the buying and selling of crypto coins contributes to the liquidity and fluidity of cryptocurrency markets.

Furthermore, the market value of cryptocurrencies can often be preserved to a significant extent during these fast-paced transactions. This is due to factors such as the broad availability of real-time market data, the presence of numerous cryptocurrency exchanges, and the active participation of a diverse range of buyers and sellers.

What Are The Disadvantages To An Initial Coin Offering?

Whether you are newly investing in ICOs or a seasoned investor, it is important to understand the disadvantages to ICO investments.


In ICOs, the absence of extensive regulation and limited guidance from securities laws has created an environment conducive to fraudulent activities. Investors need to exercise caution and take proactive measures to identify potential fraudulent behavior. Conducting thorough research and scrutinizing the ICO’s white paper is essential in this regard. Investors should seek full transparency from the company initiating the ICO, ensuring that all relevant information is disclosed.

A key indicator of fraudulent activity can be the absence of references to securities regulations or guarantees of investment returns in the ICO’s white paper. Such omissions may signal fraudulent intentions. It is important for investors to be aware of these red flags and approach ICOs with skepticism if they do not comply with applicable securities regulations or fail to provide adequate assurances.

Unfortunately, in instances where scams or fraudulent behavior occur within the cryptocurrency space, recovering funds or holding the perpetrators accountable can be challenging. The decentralized and pseudonymous nature of many cryptocurrencies, combined with jurisdictional complexities, often poses obstacles to legal recourse. Limited options exist for investors seeking restitution or legal actions against fraudsters.

SEC Violations

When creating or investing in an ICO, it is important to do your research on whether the ICO needs to comply with securities laws, or whether or not it may qualify under an exemption. Unregistered offerings can result in paying penalties for distribution, disabling tokens, and can cause financial harm to investors.

If your ICO is a security offering, then it may need to register with the SEC as well as develop some other documentation. To stay compliant with the SEC, legal requirements may include:

To be clear, if you’re selling tokens, such token issuances could be deemed securities. This is not to say all are tokens classify as securities; there are a variety of mechanisms in which people circulate initial token offerings which should be viewed as circumstantial and judged in a case-by-case manner. If you are soliciting investors for money, always assume you are issuing a security unless you speak directly with regulatory authority or qualified attorney who informs you otherwise.

High Risk

A significant portion of Initial Coin Offerings (ICOs) encounter failure within the initial months of their offering. When an investor chooses to invest in an ICO using either cryptocurrency or fiat money, it is crucial to recognize that the ICO represents a form of digital currency that holds no intrinsic value at the time of investment. The value of the ICO token largely depends on its subsequent circulation and adoption.

Investing in an ICO entails inherent risks, particularly if the token fails to gain value and widespread circulation. In such cases, investors may face the loss of their invested funds. The value of an ICO token is contingent upon factors such as market demand, investor sentiment, regulatory developments, and the project’s ability to deliver on its promises and achieve meaningful adoption.

Why Do I Need Legal Guidance On ICOs?

Entrepreneurs looking to hit it big with the next, new ICO are aware that there are big risks and potentially big rewards. It’s best to err on the side of caution legally when dealing with such high risk from both a documentation standpoint and Securities and Exchange Commission (SEC) compliance standpoint. Here is a list of the possible paperwork that is legally required or will require legal review for an ICO.

Articles of Association

A document that defines the company’s purpose and operations

Business Structure

A legal document that indicates the type of business you are establishing (e.g., sole proprietorships, partnerships, corporations, S corporations, or Limited Liability Company (LLC)).

Certificate of Incorporation

A legal document necessary to form a corporation or company

Employment and Services Agreements

A contractual agreement for independent contractors to work on specific projects

Intellectual Property

Legal documentation to protect and register copyrights, trademarks, patents, business names, ICO names, and domain names

Legal Disclaimer Clause

A disclaimer that protects you against liabilities from the ICO.

Tax Regulation documents

Regulations in place if there are necessary taxes due on the ICO

Terms of Use/Terms and Conditions and Privacy Policy

Legal documents generally provided on the ICO’s website that describe the means in which to use the product and the way in which a consumer’s data is used

Token Sale Agreements/Contracts

An agreement between the buyer and the seller of a token

White Paper

A detailed document that describes every aspect of the project in great detail. Details can include but are not limited to market analysis, business strategy, goals, technical architecture, information on the coin and how it will be distributed, legal issues, a description of your team, and list investors and advisors

Legal Opinion Letter

An exhaustive and extensive analysis of your project and tokenomics in accordance with your local jurisdiction’s securities laws written by a qualified third-party. An expert securities attorney will provide their legal opinion on whether or not your token qualifies as a utility token and you are outside of the scope of securities law.


Here are some important terms to learn when it comes to Initial Coin Offerings:

Liquidity: The ability to buy or sell an asset without affecting the asset’s value. In the crypto world, high liquidity is ideal, meaning crypto coins can be converted into other crypto coins or fiat money easily and quickly.

Coin: A coin is a store of value that is primarily used as a form of money/currency. Coins exist on their own blockchain. Examples of coins are Bitcoin and Dogecoin.

Token: A token is built on an existing blockchain and holds a certain amount of value, but that value is not considered money or currency. Most tokens will be used with decentralized applications (dApp).

Blockchain Forking: To fork a blockchain is to make a change to the network’s protocol. Forking will allow two different coins to run on the same blockchain.

Creating an ICO is detailed and complicated work. If you are in the process of creating one, contact us for legal advice on what is the right, legal documentation needed for your particular ICO and how to stay compliant with the SEC. Call us at 904-234-5653  or contact us here.

The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Securities law is complex and highly fact specific to any given circumstance and readers should contact an attorney for advice regarding any type of legal matter.

Legal Disclaimer

The information provided in this article is for general informational purposes only and should not be construed as legal or tax advice. The content presented is not intended to be a substitute for professional legal, tax, or financial advice, nor should it be relied upon as such. Readers are encouraged to consult with their own attorney, CPA, and tax advisors to obtain specific guidance and advice tailored to their individual circumstances. No responsibility is assumed for any inaccuracies or errors in the information contained herein, and John Montague and Montague Law expressly disclaim any liability for any actions taken or not taken based on the information provided in this article.

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