Launching compliant tokens | Miles Jennings | Summary and Q&A

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June 20, 2023
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a16z crypto
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Launching compliant tokens | Miles Jennings

TL;DR

Token launches are complex due to regulatory uncertainty. Tokens should not be treated as securities, and there are risk mitigation strategies for launching tokens.

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Key Insights

  • 🖤 The lack of regulatory clarity in the token market benefits bad actors while hindering companies that genuinely seek decentralization.
  • ✊ Foundations in decentralized ecosystems should have limited power, mainly supporting the ecosystem rather than controlling it.
  • 👊 Token airdrops have benefits but are subject to civil attacks, securities laws risks, and potential secondary market activity.
  • 🧑 Risk mitigation strategies include excluding US persons, using transfer-restricted tokens, and designing incentive models to align incentives with decentralized participation.
  • 👮 NFT sales have different implications compared to fungible token sales, and as NFTs carry implicit value, they require careful evaluations under securities laws.

Transcript

thank you a lot of companies are issuing tokens in the space it's a good thing to be familiar with kind of who's doing it right who's doing it wrong what what kind of is out there that is noise versus you know what is is legit um so hopefully this will give you a better sense of that um so we've we've covered decentralization um now we're gonna we'... Read More

Questions & Answers

Q: Why do companies go against the SEC's advice and not register their tokens as securities?

Securities registration prevents on-chain transactions and is detrimental to the protocol's functionalities. Token launches aim to achieve decentralization and token utility, making securities laws unnecessary, as risk factors addressed by those laws are not present in decentralized ecosystems.

Q: How can token launches ensure compliance with securities laws?

Token launches should focus on progressive decentralization, where tokens are distributed widely, and the management team's influence decreases over time. Additionally, companies must have product-market fit, a sustainable token model, and clear decentralization progress, passing the "Bahamas test" to determine if management's disappearance affects token value.

Q: What risks do companies face when launching tokens too early?

Launching tokens prematurely can distract from the core business and increase regulatory risks. It can lead to regulatory scrutiny, as the SEC may view token launches as securities offerings without proper adherence to securities laws. Token issuers must prioritize decentralization, incentivization, and security rather than creating an investable opportunity.

Q: Are all tokens subject to securities laws?

Not all tokens are securities. Tokens used for decentralized systems and with no expectation of managerial efforts contributing to their value may not fall under securities regulations. However, tokens associated with promises of future development by the issuer may be considered securities.

Summary & Key Takeaways

  • Regulatory uncertainty surrounds token launches, with the SEC's unclear guidelines on what constitutes a security. The issue is further complicated by the evolving nature of the industry and the lack of enforcement actions by the SEC.

  • Tokens differ from equity and should not be treated as such. They do not possess contractual or statutory rights, and their value is not solely dependent on the management team.

  • Tokens are necessary for decentralized systems, but drawing the line between what is a security and what is not is difficult. The SEC has provided some guidance, but it has not kept pace with the industry's developments.

  • The SEC's approach to token launches and registrations poses challenges for companies. Registering tokens as securities restricts their use on-chain, making it difficult to transact and hinder decentralization efforts.

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