Blockchain-Based Token Sales, Initial Coin Offerings, and the Democratization of Public Capital Markets

115 Pages Posted: 5 Oct 2017 Last revised: 11 Jul 2023

See all articles by Jonathan Rohr

Jonathan Rohr

University of Tennessee, Knoxville, College of Law (deceased)

Aaron Wright

Yeshiva University - Benjamin N. Cardozo School of Law

Date Written: October 4, 2017


Best known for their role in the creation of cryptocurrencies like bitcoin, blockchains are revolutionizing the way tech entrepreneurs finance their business enterprises. In 2017 alone, over $3.2 billion has been raised through the sale of blockchain-based digital tokens. Some call these token sales initial coin offerings or “ICOs,” and they have become wildly popular, with some sales lasting mere seconds. In a token sale, organizers of a project sell digital tokens to members of the public to finance the development of future technology. An active secondary market for tokens has emerged – cryptocurrency exchanges scattered across the globe offer platforms on which tokens are bought and sold, often with wild price fluctuations.

The recent explosion of token sales could mark the beginning of a broader shift in public capital markets — one similar to the shift in media distribution that started several decades ago. Blockchains drastically reduce the cost of exchanging value and enable anyone to transmit digitized assets around the globe in a highly trusted manner, stoking dreams of truly global capital markets that leverage the power of a blockchain and the Internet to facilitate capital formation.

The spectacular growth of tokens sales has caused some to argue that these sales simply serve as new tools for hucksters and unscrupulous charlatans to fleece consumers, raising the attention of regulators across the globe. A more careful analysis, however, reveals that blockchain-based tokens represent a wide variety of assets that take a variety of forms. Some are obvious investment vehicles and entitle their holders to economic rights like a share of any profits generated by the project. Others carry with them the right to use and govern the technology that is being developed with funds generated by the token sale and may represent the beginning of a new way to build and fund powerful technological platforms.

Lacking homogeneity, the status of tokens under U.S. securities laws is anything but clear. The test under which security status is assessed — the Howey test — has uncertain application to blockchain-based tokens, particularly those that entitle the holder to use a particular technological service, because they also present the possibility of making a profit by selling the token on a secondary market. Although the SEC recently issued a Report of Investigation in which it found that one type of token qualified as a security, confusion surrounds the boundaries between the types of tokens that will be deemed securities and those that will not.

Blockchain-based tokens exhibit disparate features and have characteristics that make current registration exemptions a poor fit token sales. In addition to including requirements that do not fit squarely with blockchain-based systems, the transfer restrictions that apply to the most popular exemptions would have the perverse effect of restricting the ability of US consumers to access a new generation of digital technology. The result is an uncertain regulatory environment in which token sellers do not have a sensible path to compliance.

In this Article, we argue that the SEC and Congress should provide token sellers and the exchanges that facilitate token sales with additional certainty. Specifically, we propose that the SEC provide guidance on how it will apply the Howey test to digital tokens, particularly those that mix aspects of consumption and use with the potential for a profit. We also propose that lawmakers adopt both a compliance-driven safe harbor for online exchanges that list tokens with a reasonable belief that the public sale of such tokens is not a violation of Section 5 as well as an exemption to the Section 5 registration requirement that has been tailored to digital tokens.

Keywords: Blockchain, Smart Contract, Token, ICO, Crowdfunding, Cyberlaw, Cryptocurrencies, Virtual Currencies, Information Law, Internet, Securities Law, Venture, Entrepreneur

Suggested Citation

Rohr, Jonathan and Wright, Aaron, Blockchain-Based Token Sales, Initial Coin Offerings, and the Democratization of Public Capital Markets (October 4, 2017). Cardozo Legal Studies Research Paper No. 527, University of Tennessee Legal Studies Research Paper No. 338, Available at SSRN: or

Jonathan Rohr

University of Tennessee, Knoxville, College of Law (deceased)

1505 West Cumberland Avenue
Knoxville, TN 37996
United States

Aaron Wright (Contact Author)

Yeshiva University - Benjamin N. Cardozo School of Law ( email )

55 Fifth Ave.
New York, NY 10003
United States

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