If you want to raise funds for your startup, you might consider initial coin offerings (ICOs). Blockchain technology is transforming entire industries, from enhancing supply chain transparency to improving record-keeping. Despite the benefits of this fundraising method, scams, rug pulls, and price volatility drew regulatory attention from government agencies worldwide, including the attention of the Australian Securities and Investments Commission (ASIC). As a result, there are several regulatory issues to consider when undertaking an ICO or selling tokens privately. This article will identify and explain the key questions you should consider before offering any tokens to the public.
Initial Coin Offerings vs Capital Raising
ICOs usually require startups to market the tokens they intend to sell by creating a website and publishing a white paper. A white paper is a document describing the project, token utility and tokenomics. These startups then conduct the sale of the tokens, usually via a decentralised exchange (a ‘DEX’) or directly from their website. People who intend to purchase these tokens will exchange cash, but more often, cryptocurrency, such as Bitcoin, Ethereum or USDC, in exchange for the tokens.
The funds raised allow the business to develop its project, which is built on blockchain technology. Because an ICO is borderless, startups can raise money from investors across the globe in a relatively short period.
In contrast, under traditional capital raising models as a startup, you would approach investors and negotiate the terms of investment based on factors such as valuation, board composition and investor rights. Your company would give an investor equity, or the future right to purchase equity, in exchange for their investment.
What Rules Apply to Initial Coing Offerings?
The laws that apply to an ICO will depend on whether the token is a financial product. The Corporations Act 2001 defines a financial product as a facility through which a person:
- makes a financial investment;
- manages financial risk; or
- makes a non-cash payment.
For instance, a share, derivative or interest in managed investment schemes.
The table below summarises the rights and obligations that apply to some of the main financial products you would likely encounter.
Financial Product | What is it? | Features indicating the token is this type of financial product | Obligations placed on the offeror |
Share | An interest or collection of rights in a company. | The token carries either ownership rights, voting rights, or the right for the investor to participate in future profits (a dividend). | The offeror must obtain an AFSL and Prepare additional disclosure documents. For example, a prospectus can dramatically increase compliance costs. |
Managed Investment Scheme (MIS) | A group of people pooling assets (e.g. does the investor receive cash or cryptocurrency) for financial gain, and participants do not have day-to-day control over the scheme (a responsible entity usually manages the scheme). | The token’s value is affected by the pooling of funds and the company’s collective use and management of those funds. | The offeror must register the managed investment scheme. Additionally, the offeror must comply with product disclosure and licensing obligations, including obtaining an Australian Financial Services Licence (AFSL). |
Derivative | A product that derives its value from something else (the underlying asset). For example, an instrument linked to the price of coffee (a coffee ‘future’) or an option gives the optionholder a right to sell their options for shares in the future. | An underlying market or asset price defines the value of the token. For example, you buy a coffee future today expecting the price of coffee will increase. You can then sell the coffee future at a higher price. | Derivatives are highly regulated. Hence, the offeror must prepare disclosure documents and obtain an AFSL. Ultimately, structuring and compliance are very costly. |
Applying Australian Consumer Law
If the token is not a financial product, then the general law, including the Australian Consumer Law (ACL), will apply. ASIC recently updated its guidance on ICOs, stating that it can take action against a company for misleading and deceptive conduct connected to an ICO.
This applies to both the white paper and promotional material, for example:
- falsely claiming that you have a partnership with an existing financial institution such as a bank or credit card company;
- falsely claiming that the token is backed by another commodity, such as gold, real estate or diamonds;
- publishing misleading information about your advisory board or development team;
- using social media to generate fake hype around your ICO, such as creating fake profiles from which to promote the ICO;
- failing to disclose information in your white paper;
- falsely advertising high returns on your token; or
- coordinating sales and purchases to generate the appearance of high activity for your ICO.
Applying Foreign Law to Australian Initial Coin Offerings
If you sell your tokens overseas to a foreign citizen or a resident buys your tokens, your ICO may be subject to foreign securities and privacy and consumer laws.
Offerors should then limit their offer to a certain country or type of investor by:
- including a term in their white paper that explicitly excludes certain citizens from participating in the ICO;
- geofencing to exclude citizens from countries with unfriendly or uncertain ICO regulations (for example, citizens from China or South Korea that have banned ICOs); and
- requiring investors to provide proof of citizenship through a Know-Your-Customer application to participate in the ICO.
You should also seek legal advice in the countries you intend to offer your token. For example, if your ICO is considered a security in the United States, you will need to register with the Securities and Exchange Commission. Additionally, if you are exchanging tokens for money or virtual currency, you may have to register with the Financial Crimes Enforcement Network.
Continue reading this article below the formLegal Obligations When Issuing Tokens
The following questions can help determine your legal obligations.
Issue to Consider | Questions to Ask |
The structure of the ICO | Who are my investors? Which country are my investors located in? Who is actually issuing the token? |
What does the investor receive for their investment | What does the token allow the investor to do (for example, access your product)? |
What rights attach to the token | Will the investor have a right to future products, a right to vote or to access a platform open only to token-holders? Will rights change over time? |
How will you use the funds moving forward | What will your company do with the funds you raise from the ICO? How will you measure progress toward operational/performance benchmarks and communicate that progress with investors? |
The rights attached to the tokens will determine the legal obligations you may need to comply with. It does not matter if you call your asset a ‘token’. If it has the hallmarks of a financial product, such as a share or managed investment scheme, then the laws that apply to financial products will apply to your token.
AML/CTF Obligations
Australia’s anti-money laundering (AML) and counter-terrorist financing (CTF) regulator, the Australian Transaction Reports and Analysis Centre (AUSTRAC), recently amended the Anti-Money Laundering and Counter-Terrorism Financing Act 2006.
The AML/CTF regulation applies to digital currency exchange providers (DCE). It requires a digital currency exchange provider to:
- register on the Digital Currency Exchange Register;
- adopt and maintain an AML/CTF program to identify, mitigate and manage the risks;
- identify and verify the identities of their customers (KYC processes);
- report suspicious matters that exceed $10,000 or more; and
- keep certain records related to transactions for seven years.
The Act will impact businesses that convert digital currency to money or vice versa. So, if your project accepts fiat currency in exchange for a token, you may need to register.
How Are Initial Coin Offerings Taxed?
Regarding the tax treatment of ICOs, taxation follows the attributes of the tokens used rather than the form. Taxation follows the underlying nature of the rights and obligations attached to the token. This means that the tax treatment of tokens is consistent with other commercial transactions, financial instruments and capital raising mechanisms.
For example, if a token is accompanied by the right to ownership, vote or receive a dividend, it will be treated akin to shares. In this scenario, the offeror of the tokens will not be taxed for issuing the token. Nevertheless, the investor will be subject to capital gains tax when they sell the tokens.

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The guide includes 10 case studies featuring Australia’s top VC fund partners and leading Australian startups.
Key Takeaways
Initial Coin Offerings (ICOs) provide blockchain startups with an exciting new avenue to access capital for their projects. However, regulatory uncertainty remains a challenge for token offerors. Because an ICO is borderless, it is hard to know which countries’ laws will apply. However, the consequences for selling unregistered security are severe. Considering this regulatory complexity and the increased supply of venture capital, other types of fundraising options are available to startups in web3, including NFT sales and simple agreements to future tokens (SAFTs).
If you have any questions about fundraising in web3, including Initial Coin Offerings, NFT sales, or SAFTs, our experienced fintech lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A financial product is a facility through which a person makes a financial investment, manages financial risk, or makes a non-cash payment.
If the token is not a financial product, Australian Consumer Law will apply. Hence, ASIC can take action against a company for misleading and deceptive conduct connected to Initial Coin Offerings.
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