Equity Initial Coin Offerings: (Nearly) Every Crowdsale Should Offer Equity

Is the market dead for 100% non-dilutive, massive token and coin crowdsales? Probably not wholly, but investors and issuers are getting smarter about how they both structure and invest in such deals. And, thanks to the fact that the SEC has staked its claim on most ICOs (yes, even utility tokens), there are now stronger arguments than ever to include at least some equity in your token offering.

Tax Problems

Others have rightly outlined the major tax issues inherent with initial coin offerings. In the current industry landscape, mitigating tax burdens of an ICO can be done somewhat using the legal structure of the entity, but ultimately the tax obligation should have both issuers and investors singing a different tune.

Investor Incentives

Because many of the incentives that currently drive investors toward ICOs include the opportunity to have instant liquidity through pre-sale discounts and immediate token vesting, equity may not be a compelling-enough argument, but as selling restrictions and attempts at capping token velocity increase, I would imagine investors may need another carrot to sweeten the offering, especially among the current barrage in the industry.

Securities Compliance

As stated above, recent comments by SEC Chairman Jay Clayton should push more offerings toward traditional securities exemptions, but may also have investors and issuers questioning the structure of the deal, particularly if Rule 144 legend rules also apply to issued utility tokens as well as stock–good for token velocity, but bad for pump-and-dump immediate token investment liquidity. In short, securities compliance may naturally gravitate more offerings toward equity.

M&A Considerations

Selling a community whose sole existence and network is tied to a non-fiat-based economy is likely to rob would-be business sellers of the potential of auctioning off the company at some point in the future.

More traditional equity or SAFE (simple agreement for future equity) may make more sense as it creates a true entity structure where more than just a utility token increases in value.

In terms of structure, there are a number of ways to question how an offering would look, including:

1. Traditional Equity vs. SAFE on a Smart Contract
2. Utility Token/Coin vs. Security Token/Coin via a SAFT Agreement (which may eventually not make a difference for most offerings)
3. Form 2553 for Corporate Structure Declaration (S-Corp vs. C-Corp election)

In the end, determining the proper structure requires a deep dive into the existing business and navigation of the various options available. In some cases, a traditional Reg D offering + airdropped coinage may make sense.

While I imagine many different forms will emerge, eventually I would expect a very small handful of standardized structures for this new asset class and securities offering. What do you think? How do you expect the structure to emerge?