Using Escrow Accounts in Initial Coin Offerings
Hey, everyone. So wanted to tackle the issue of escrows with respect to ICOs. You see a lot of press recently about certain ICOs missing their target and then sending back, you know, what money was raised. And so the question becomes, do you really have to do that? And I think the question’s twofold.
One, if what you’re selling is, you know, ideally a security or tantamount to being a security, then under law if you’re doing all or none or part or none, meaning there’s a minimum amount that you must raise, if that’s the type of…the nature of the offering that you’re doing and you fall short of that, legally, you have to use an escrow and, legally, you have to return all the money. Okay?
If yo do a best efforts, which says, “I’m gonna raise a million dollars. No matter what amount I raise, I’m gonna keep that amount of money,” you don’t have to use an escrow and you don’t have to return the money if you fall short. Now that’s under Regulation D and that’s also to a lesser extent under Regulation CF.
So what happens if you’re doing an ICO and you’re not doing a securities offering, then ICO or that token is not a security. There really is no guidance, but my thought is this, from a liability standpoint, if I’m gonna set out and say, “In my use of proceeds, in my ICO, I’m gonna raise $5 million because I need at least $4 million to get this project off the ground. If I don’t make the $4 million I may not be able to do it.”
And that’s the disclosure, you need to put in there from a risk factor standpoint, which is a totally different subject for another video another time. But the reality is I think it’s best practice if you fall in an ICO, so far short of where you wanna be with respect to what you need to actually get your project off the ground, that I think you have to return the money.
I don’t think you necessarily need to commit to a part or none or an all-or-none. You can sell it best efforts. But I think it makes sense to employ at least a segregated account, if not an escrow, up to a certain amount because through…in functionality, if you don’t raise enough money to even start your project or even get it to a certain point of viability, I think you create a huge liability from yourself.
Because the question becomes, “With all the Bitcoin and all the money that you collect, what are you doing with it?” If you can’t employ it to get your project to a certain point where there’s market progress, where there’s actually some asset value behind that ICO, I think you’re creating a huge liability.
So I’m a big fan of putting a minimum amount. You can do a best efforts type basis, offer some type of minimum amount. Maybe you don’t necessarily have to rely if you’re not offering a securities…security in your ICO on either a segregated account or an escrow account. It’s not mandated because there just is no law, but I think from a practical perspective, if you’re gonna do an ICO and you’re gonna fall short and there’s nothing you can do to get your project to minimum viability, you have to return the ICO proceeds.
There’s just no way around it, because at the end of the day, you’ve effectively collected a bunch of money on a project that ultimately is not gonna get off the ground until it obtains additional financing. And granted, you can put risk factors in your disclosures that account for that, but to a large extent that still creates a liability for you because at the end of the day you’re collecting money, and what’s the money gonna be used for, right? You can employ to the project, but the project may ultimately be worthless.
So, you know, I think the best idea is set a minimum floor. It can be pretty low, but at the end of the day, look at what you need to reach minimum viability, and that’s around where you should definitely employ, you know, a minimum with respect to raising ICO funds. And as far as a segregated account, the escrow account, it’s, you know, I get a lot of questions, “Well, how do you do an escrow account if you have Bitcoin? How do you…” You know.
It’s very easy. I mean, you could open an account or have an attorney open an account, add, you know, a coin base, have an account on your own and simply sign those rights to a third party and limit control to that third party and then create an escrow agreement between you and that party.
So it’s very simple to sort of create segregated accounts or escrow accounts in the absence of paying somebody who, you know, allegedly or purportedly specializes in escrow, which really doesn’t exist yet in the crypto space. But you can definitely do it with an attorney or, like, an accountant or some third party through a properly drawn escrow agreement, funds management agreement, and then restricting access to that account.
So again, if you have any questions with ICO’s minimums in the use of segregated accounts, escrow accounts, give me a shout, you know, contact me through Bitcoin Attorney website. All right, take care.