On 10 August, Filecoin launched the latest of many 'initial coin offerings' or 'ICOs' (see Freshfields Digital's "$35 million in 30 seconds: Initial Coin Offerings explained"). When the sale period ends, FileCoin will have raised a record-setting $251 million, bringing year-to-date ICO investments to nearly $2 billion.
This particular ICO is novel from a legal and regulatory perspective. To comply with SEC and FCA securities regulations, for the first time only accredited investors are allowed to subscribe for Filecoin tokens (called 'FIL'). This subscription has been undertaken through the use of a new Simple Agreement for Future Tokens (SAFT) and accompanying offering memorandum.
What is FileCoin?
Filecoin is a decentralised storage network that will use the peer-to-peer 'InterPlanetary File System' (IPFS) to securely store files and data. Simply, users who donate their computer's unused storage space are rewarded with FIL tokens, which can be exchanged for Bitcoin, Ether or US dollars. Conversely, clients could convert fiat currency to FIL tokens, which would be spent in order to store data on the Filecoin network.
This method of storing data contrasts with expensive physical data centres used in offices or, for example, Google Drive, Amazon Web Services or iCloud.
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How has FileCoin approached securities laws?
As noted in previous Freshfields Digital blog posts, the SEC has recently announced that some tokens fall within the Howey definition of securities, and as such are subject to US securities laws. The SEC has subsequently suspended trading of shares in issuers of questionable ICO tokens (see "SEC suspends tech company shares over crypto coin concerns".)
Protocol Labs, Inc., the US software company behind Filecoin, has sought to comply with securities laws, through the use of the 'safe harbour' private offering exemption available under Section 4(a)(2) of the Securities Act, and Articles 48-50A of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. By restricting the offering to accredited or high-net worth investors, the issue is not subject to registration or review requirements.
What is the Simple Agreement for Future Tokens (SAFT)?
Protocol Labs has effected the offering via a 'Simple Agreement for Future Tokens' (SAFT) (link) and accompanying offering memorandum (link). Under the SAFT, accredited investors acquire the right to purchase future FIL tokens once the Filecoin network is fully developed and launched.
The SAFT and offering memorandum outlines to prospective investors the lengthy list of risk factors associated with investing in the Filecoin project and blockchain technologies generally. This contrasts starkly with the vague and ambiguous 'white papers' of many previous ICOs.
Overall, this token sale represents an interesting legal development in applying existing securities law to the 'Wild West' of hitherto unregulated ICOs, and will continue to be a field worth watching closely.