January 27, 2023

Legal aspects of IEO in Russia

Cryptocurrency regulation is no longer a priority for lawmakers, said the prime minister Dmitry Medvedev. A few weeks later, the Russian central bank added that although cryptocurrencies do not threaten the country's monetary system, the regulator opposes their legalization.

When the country lacks regulation, and inthe world as a whole there is a problem of clear legislation governing digital assets, start-ups working in the new industry are faced with the task of attracting funding to blockchain projects that would best meet the requirements of world regulators. The solution may be an initial exchange offer (IEO), which replaced the ICO, which did not meet the expectations of either projects or investors due to the abundance of fraudsters and legal difficulties.

What is IEO?

IEO (Initial Exchange Offering) is conductedcrypto exchanges on behalf of projects on special platforms managed by exchanges. During the ICO, token issuers themselves were involved in the entire process of attracting financing.

“IEO is a form of attracting investment in the form ofthe implementation on the basis of the crypto exchange of a fixed number of tokens issued by one-time or accelerated issuance, ”explains Nikita Kulikov, founder of ANO PravoRobotov. According to him, IEO has similarities with crowdfunding, but is more like trading in futures, which eventually turned into a commodity, regardless of what kind of commodity they were released on.

The main advantage of IEO in the eyes of investorslies in the fact that the crypto-exchange carries out the initial filtering of projects and selects those that meet its requirements, filtering out fraudulent, suspicious and unpromising ones. If during the ICO, investors sent their tokens to the addresses of the projects themselves, expecting - sometimes in vain - to receive tokens of the future platform, then during the IEO, the projects first transfer the tokens to the exchange, and it sells them to investors at a certain price. On the one hand, there is some centralization of the blockchain space. On the other hand, it was this form that attracted investors who wanted to secure their investments in crypto assets.

Token sale is the first high-profile IEOBitTorrent on the Binance Launchpad platform in January 2019. Tokensale completed in 15 minutes, and the first $ 6 million was collected in a record 22 seconds. Following the success of the first IEO, other crypto exchanges also began to launch their platforms for conducting exchange offers - Bittrex IEO, Huobi Prime, OK Jumpstart, Coineal Launchpad and KuCoin Spotlight.

Why IEO startups?

In addition to solving the most urgent task ofraising funds, IEO has a number of related advantages that will make the work of startups developing blockchain solutions more stable and long-term. One of the problems is the refusal of banks to open a current account for projects working with blockchain and digital assets. Financial institutions fear that projects will not be able to comply with anti-money laundering or counter-terrorism financing regulations.

"Since the exchange will be engaged in verificationusers (AML / KYC), this will increase the startup’s chances of opening a fiat bank account, ”said Mikhail Uspensky, tax specialist and taxology partner.

The second problem often encounteredprojects that attract financing are ensuring the liquidity of their tokens. In the case of IEO crypto exchanges, on the platform of which the initial sale of tokens took place, these tokens are usually listed.

“Lack of liquidity is biga problem for projects that are just starting to bargain. The lack of liquidity leads to low convertibility of the project’s tokens, and this immediately turns away from them those users who are not ready to take such a risk and buy assets that they can’t quickly get out of, ”explains Yevgeny Egorov, head of the Russian representative office of the world crypto exchange Coineal.

How to conduct IEO?

Although IEO, on the one hand, greatly simplifiesthe task of startups to attract financing, a number of other issues arise that need to be solved in order to be among those lucky ones who turned out to be large crypto exchanges for IEO on their sites. At stake is the reputation of the exchange, which promises to carefully select the projects offered to investors on its platform, so startups will have to carefully prepare and think through all the legal aspects related to the work of the project.

First, the cornerstone does not disappearglobal crypto regulation - security vs utility. Projects should choose what purpose their tokens will perform, bearing in mind that if tokens have the attributes of securities, then they will have to comply not only with the rules of their jurisdiction, but also with the rules of the country of which their investor is a citizen. “One must be realistic - it is very difficult. Registration of security tokens, for example, in the Swiss regulator will require at least six months and several hundred thousand francs. It’s long enough, difficult and expensive that it’s easier to refuse to issue security tokens in favor of the utility model, ”Uspensky notes. According to him, the registration of utility tokens in most financial regulators will require significantly less effort, investment and time - up to six months. At the same time, he admits that no matter what token - security or utility - there are risks regarding the position of the American financial authorities, which each utility token suspect that it is actually a security, and therefore must comply with the requirements of the legislation on US securities.

Secondly, large cryptocurrency exchanges managingplatforms for IEO, require projects to prepare a full package of accompanying legal documents - a conclusion that describes the jurisdiction of the token issuing company, the tax system, risk assessment of the project’s business model, token issuing prospectus, user agreement, privacy policy.

Regulatory Ambivalence

The fundamental problem in IEO islack of clear legislative regulation both within one country and at the international level. The industry is developing faster than the clumsy bureaucratic apparatus.

In many jurisdictions, regulators have voiced theirposition: it is necessary to regulate in order to prevent abuse, but how and how to establish a framework in a world where there are no familiar borders, they themselves do not understand. The fact of issuing, acquiring, selling a digital asset for most regulators is not as interesting as the fact that fiat money arose as a result of these actions, for example, after the resale of tokens, Kulikov explains.

“The jurisdiction of the exchange does not matter much, asand the place of registration or registration of the seller and investor, but only as long as these digital assets remain digital and will not be converted into foreign currency, ”he adds.

Over time, the regulatory situation,Undoubtedly, it will change: the more token trading resembles classic exchange trading, the more likely it will be licensed like other financial services. But until this happens, projects that are planning IEO should carefully evaluate all the advantages and risks associated with attracting funding on cryptocurrency exchanges.

Posted by: futuretime