iConsult Cosmecoin, first to use RCSC (Residency Confirmed Smart Contract)
NOT FOR PUBLICATION OR DISTRIBUTION IN THE UNITED STATES, CANADA OR JAPAN.
One of the key considerations for a Company who aim to raise funds via an ICO is how to be compliant with US security laws.
Whilst each country has its own approach and legal interpretation to dealing with cryptocurrencies, the US is widely acknowledged to be the “world’s” gold standard when it comes to legislating for securities issuance. Inevitably, it follows, that most other jurisdictions will start to align their interests accordingly as the world’s regulators grapple with the best way to deal with token issuances.
The SEC (Securities and Exchange Commission), has recently stated that they view most tokens in issue as securities and not utilities, and has further acted in cracking down on cryptocurrencies by issuing over 80 subpoenas to those companies and their advisers, they suspect of having misled or misinformed their investors by issuing “utility” coins/tokens which instead act more like securities when traded on exchanges.
The Howey test introduced shortly after the SEC vs. Howey case in 1946 is a recognised standard that the SEC use to benchmark whether certain transactions qualify as investment contracts. The outcome of the test when applied to “tokens”, as is now the case, matters, as designation as a security means that the Company has to comply with certain registration and disclosure requirements.
Under the Howey Test, a transaction is an investment contract if:
- It is an Investment of Money
- There is an expectation of profits from the Investment
- The investment of money is in a common enterprise
- Any profit comes from the efforts of a promoter or a third party.
The Supreme court in deciding whether an investment opportunity qualifies as a security created a test which looks at substance over its form.
Mainstream publications interested in these developments are also chiming in. Lexology a US-based legal blog recently reported that the SEC was keen to act now [against the continued and sustained token issuance] so as to:
“Ensure that investors are protected against fraud and abuse and receive the protections of the securities laws (including required disclosures) as well as the important role of lawyers and other professionals in advising clients how to comply with their securities obligations”.
The issuer may, of course, choose to pursue a more formal SEC registration which brings them into line with regulated securities offerings, however, this process has previously been shunned due to onerous disclosure obligations which Companies had hoped to avoid. This, however, is now coming back to haunt them.
Companies located outside of the US also have a responsibility to act appropriately. When tokens issued by foreign Companies which may be declared as “utilities” under local law finally make it on to an exchange, there is a danger that if they are purchased by US persons and the token is then seen to be demonstrating characteristics of being a security (in the eyes of the SEC), then these tokens may be subject to injunctive measures by the regulator, as we have seen with the latest flurry of Subpoenas.
When issuing securities in a traditional sense, investment banks are responsible for controlling the flow of information through approved channels in which an offer can be made, and the law can be adhered to. In the crypto space, the absence of a bank, coupled with the progressive rise and influence of social media outlets, and now the general public being able to participate in early-stage blockchain related investments, requires a different course of action (and control) to be followed. As definitive regulation catches up with technology and more certainty around transaction structure is put in place, the ICO market is in a state of limbo. Best practice borrowed from other areas of the law seems to be the way forward for the time being.
In an effort to put some more certainty around the process, one Company in the UK is innovating accordingly.
iConsult is an award-winning UK based patient care app for the Medical Aesthetics sector. The Company, who have customers in the UK, Australia, and in the US are looking to swap out their conventional technology platform and introduce blockchain in an effort to improve efficiency and trust within the community. They aim to do this whilst maintaining a better standard of care ( for instance practitioners can now track the post-procedure healing process remotely via an app), and audit accountability (by having patient records hosted securely in the cloud).
Cosmecoin will be powered by the first decentralized ecosystem, connecting Aesthetic Practitioners with consumers and uniquely it will be applying an enhanced ERC20 protocol which will restrict the transfer of tokens to investors on the secondary market who have not been confirmed as being able to participate under REGISTRATION S rules, i.e. non-US persons. This new protocol has been dubbed, Residency Confirmed Smart Contracts or ("RCSC"), and it could prove to be the most effective way for foreign Companies wishing to raise money via a token sale, whilst respecting US Security laws in the process.
Richard Crawford-Small, the founder and CEO of iConsult, commented:
“iConsult has strong principles as a company. From Day One we wanted to do the right thing and we have applied those values to our ICO. By working closely with leading lawyers and our high calibre advisors, we have managed to create a process which we believe is the blueprint for a compliant offering”.
The Company has devised a technical way to limit their fundraising so that it is only offered to prequalified persons within foreign markets and crucially the platform will be able to stop the flow back of tokens into embargoed territories.
Investors wishing to trade their coins either privately or via an exchange have to be approved to do so using an advanced whitelisting process. The solution that the Company have developed allows a seamless interaction between the original ERC20 code and the new protocol allowing previously non-registered “buyers” to have to verify whom they are when attempting to purchase the token. In doing this, it has been advised by a major “Magic Circle” law firm headquartered in the UK.
Robert Westmacott Non-Executive Director and technology adviser to the Company, at iConsult, commented,
“It was important for us to develop a process which was able to deal with the US security law requirements, as in the eyes of the SEC we are viewed as a security token and not a utility, which is not necessarily the case under UK law. I believe that we are the first Company to raise funds in this way and as a consequence, we are compliant with relevant securities laws and should provide a proper precedent for others, similarly looking to offer their tokens directly to consumers”.
Technology is indeed an enabler in many forms, it can not only be used to drastically reduce inefficiency and lower cost, it can also be deployed effectively as a means of compliance adhering to best practices without slowing down the pace of fast-moving markets.
Neither this article nor anything contained herein shall form the basis of, or be relied upon in connection with, any offer or commitment whatsoever in any jurisdiction. Any offer to acquire tokens will be made, and any investor should make its investment decision solely on the basis of the information that is contained in the information memorandum to be published by iConsult Software Ltd in due course in connection. Copies of the information memorandum will, following publication, be available at www.cosmecoin.io.
These materials are not an offer of securities for sale in the United States. The securities to which these materials relate have not been registered under the US Securities Act of 1933, as amended (the "Securities Act") or the securities laws of any state or jurisdiction of the United States. Accordingly, these securities may not be, sold, pledged, assigned, delivered or otherwise transferred, exercised or redeemed, at any time, within the United States or to, or for the account or benefit of, U.S. Persons. There will be no public offering of the securities in the United States.