It is growing more and more common for ICOs to be exclusive to "accredited investors". This is a highly contentious issue in the altcoin world, as it violates the decentralized, democratized spirit of altcoins. This article looks at what an accredited investor is and why an ICO may want or may need to advertise to accredited investors.
What Accredited Investors Are
ICOs are, by their nature, highly speculative investment devices. There are currently few reporting requirements required for either investors' disclosure or profit reporting. Typically, an investor only has a prospectus and a white paper to judge the value of an ICO; there are no requirements that the provided documents have to be verifiably true, no proof-of-concept or proof-of-work is legally needed, and there need not be any demonstrable proof that the ICO can be commercially viable or even plausible.
This is problematic because many ICOs can be defined as securities. In general terms, an ICO is a security if it deals with fiat currency or real-world property. This can be tested by a legal device known as the "Howey Test". The Howey Test, named after the U.S. Supreme Court case SEC v. Howey Co., dictates that an investment is speculative and subject to SEC oversight if it is dependent for its profits on the labor and efforts of others.
Securities unregistered with their federal government in countries that have American-styled security enforcement cannot be sold to the general public. They can, however, be sold to a class of investors that have demonstrated that they can materially absorb the risk such investments have. These investors are called "accredited investors".
Under Regulation D of the United States Securities and Exchange Commission rules and regulations (Title 17, Code of Federal Regulations, part 230, section 501; Securities Act of 1933, section 4, subsection 5), accredited investors are allowed to participate in debt-bearing security sales, given that they can prove they are financially sophisticated and have a reduced need for protection. Typically, with large institutions like banks and trusts, the suitability test is met by satisfying several minimum requirements. In the United States, these include one or more of the following:
- An annual earned income of $200,000 ($300,000 for joint incomes) for at least the last two years
- A net worth of $1,000,000 or more, excluding the cost of the primary residence
- Being a general partner, executive officer, director, or senior manager of the securities' issuer
- Being a business - without the exclusive goal of purchasing a specific security - in which equity owners are accredited investors or have assets exceeding $5,000,000
- Registered brokers and investment advisors
- Anyone that can demonstrate he or she has the education or work experience to fully understand the risk in unregistered securities
Whale Hunting by Startups
While an ICO may seek to limit itself to accredited investors to stay in compliance, non-securities ICOs may seek out accredited investors as well. Despite most altcoins not being subjected to SEC or any other national financial authority oversight, some altcoins have used the term "accredited investors" to identify and single out potential institutional or significant position investors, commonly referred to as "whale" investors.
When FileCoin, a decentralized storage network, launched its ICO in August 2017, the sale was exclusive to accredited investors. FileCoin raised approximately $186 million in its first hour and nearly $250 million total for the sale. Before the sale, FileCoin raised $52 million from venture capital firms by offering a discounted token. Purchasing the token at this price locked in the tokens to a minimum one year vesting period, however, with the firms offering FileCoin strategic advice.
This kind of positioning, however, gives the impression that some ICOs are more interested in tallying big crowd-sale tallies rather than offering a new altcoin to the altcoin community. With an increasing number of ICOs being institutionally-controlled, there are serious questions as to whether this methodology is healthy for the industry or not.
While there is currently no consensus on the morality of using such marketing devices, an investor must ask if trusting an ICO that utilizes such methodology is truly worth the risk.
As you can see, the world of ICO investing is sometimes confusing and fraught with challenges. Want to learn more about initial coin offerings and investment? Read Bitcoin Market Journal and learn to invest like a pro!