SEC registration is something required for many businesses, especially if they are looking to raise capital using ICOs. There can be a lot of confusing information out there, and business owners may not know what to do. If you wish to take part in investment opportunities or boost capital using ICOs, you may be in the same boat.
ICOs and their technology are great for performing financial transactions. At the same time, they are not the safest. There is a high risk of manipulation and fraud that comes with them, mainly because these assets’ markets are not as regulated as traditional markets.
With that in mind, you may be wondering “What happens if I don’t register my ICO with the SEC?” This post will clarify everything for you.
What Are the Risks of ICOs?
Despite bringing many advantages to the table, ICOs have several risks too. A lot of them may not actually be what they seem. Some may be frauds, which can have a bad impact on you. You would end up losing a lot of money, and they may also be a huge manipulation or loss risk.
The Importance of Security and SEC Registration
You may not know whether SEC registration is necessary as you are planning to conduct an initial coin offering sale. Well, whether you need to register this sale with the SEC or not will depend on how SEC classifies the token.
The SEC can look at an agreement and figure out whether it is a security based on how it is executed. They will look into the transaction’s substance to determine if it is a security under the Security Act of 1933. The Howey Test is applied when making this analysis.
In order for a property sale to make an investment contract under a Howey Test, it must have three elements. Something qualifies as security if there was a money or property investment into a common enterprise, if it had a profit expectation and if the investment was made with others’ efforts. When all of these things apply, investors need protection, so every individual offering the sale should register with the SEC or qualify for a registration exemption.
What Happens If You Don’t Register with the SEC?
Not registering with the SEC can have serious consequences as you will be penalized, and you will have to pay large sums of money.
One example is the situation of Airfox, which was able to raise $15 million for the development of an app that people could use to earn tokens and take them for mobile data. Then, Paragon wanted to help the development of a “decentralized solution for the cannabis industry”, so they raised $12 million.
Both of them were penalized by the SEC, each company getting $250,000 penalties. Not to mention that they had to compensate the affected investors and register their tokens as securities. Paragon filed for bankruptcy, and then, the founders and executives became liable for more than $12 million in a civil suit.
Conclusion
So, if your sale meets all three elements of the Howey Test, you should register it with the SEC. Otherwise, there will be serious consequences and you will be penalized.
