An initial coin offering (ICO), also called a token sale, is a way for a project or organization to raise money by issuing and selling digital tokens. Buyers may pay with dollars or virtual currencies. The tokens’ rights vary: they might provide access to a platform, confer other participation rights, or be promoted as an investment. An ICO does not automatically give buyers shares or ownership in a company.
How an ICO works
- A project offers tokens. A promoter creates or issues digital tokens, often using blockchain technology.
- Buyers pay for them. Payment may be in fiat currency, such as dollars, or in virtual currency.
- The project uses the proceeds. The issuer may say the money will fund software, a platform, or another project.
- Token holders use or trade the tokens. Depending on the terms, tokens may provide access to or participation in a project, and they may later be resold on secondary-market platforms. Not every ICO has the same structure, rights, or resale market. The SEC’s Investor Bulletin on ICOs describes these general patterns.
Blockchain is a distributed electronic ledger maintained by network participants, with cryptography used to process and verify entries. Some organizations or functions are represented in code on a blockchain; code that automates functions may be called a smart contract. These technologies describe how an offering may be organized, not what legal rights a token necessarily carries.
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What an ICO token may—and may not—represent
A token’s terms determine what its holder can do or claim. It may unlock software or platform features, grant other participation rights, or be promoted with the expectation that its value will rise. Do not assume that buying a token means acquiring stock, voting rights, a claim on company assets, or a guaranteed way to use a finished product. Read the offering materials for the actual rights, restrictions, and conditions.
Calling a token a “utility” token does not by itself resolve its legal status. In a December 11, 2017 statement, SEC Chair Jay Clayton said that merely giving a token some utility does not prevent it from being a security; the substance of the offering matters, including whether buyers reasonably expect profits from the efforts of others. That statement is a dated description of the SEC chair’s position, not a determination about any particular token. Read Clayton’s statement.
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ICO, IEO, and IPO: what is the difference?
| Offering | Basic structure | What buyers should not assume |
|---|---|---|
| ICO | A project or promoter issues and sells digital tokens to raise funds. | The token necessarily represents shares or company ownership. |
| IEO | An initial exchange offering is conducted through an online trading platform on behalf of a company. The platform may charge a fee and may facilitate trading. | The platform’s involvement or claims that it vetted an offering prove legal compliance or eliminate risk. |
| IPO | A traditional initial public offering generally concerns a company offering shares to investors. | That an ICO is equivalent to an IPO; the SEC materials cited here do not provide a full ICO–IPO comparison, and token rights vary. |
The SEC’s IEO alert warns that using a trading platform does not, on its own, establish that the platform or offering meets U.S. requirements. See the SEC’s IEO investor alert.
How U.S. securities rules may apply
Whether an ICO token is a security depends on the facts and circumstances of the particular offering. The SEC’s July 25, 2017 bulletin says that if tokens offered or sold are securities, federal securities laws apply to the offer and sale, including applicable registration requirements or an available exemption. This is U.S. regulatory context from SEC materials published in 2017 and 2020; it is not a statement of current law in every country or a legal assessment of a specific offering.
For a U.S. offering, check whether the issuer explains its registration status or the exemption it relies on, and verify claims where possible. The SEC bulletin points readers to EDGAR for filings such as Form S-1. Its investor education material is not a legal interpretation; for questions about an offering’s legal status, consult a securities attorney.
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Questions to check before considering a token sale
- Use of proceeds: What does the issuer say it will do with the funds, and are the plans specific?
- Token rights: What, precisely, does the token let you access, do, or claim? What rights does it not provide?
- Refunds and resale: Is there a refund right? Are transfers or resale limited, and when?
- Code and security: Is the blockchain open and public? Is the code published? Has an independent cybersecurity audit been conducted?
- Regulatory claims: Does the issuer identify a registration statement or a specific exemption? Can those claims be verified?
- Sales tactics: Be wary of promised or guaranteed high returns, unsolicited offers, pressure to buy immediately, and unlicensed sellers.
- Custody and recovery: Tokens or virtual currencies can be stolen through hacks or malware, and recovery after fraud or theft may be limited.
These checks are not a guarantee that an offering is safe. They help clarify what is being sold, what protections may apply, and what risks remain. The SEC’s ICO bulletin outlines these investor questions and risks.
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