All You Should Know About Social Token's Legal Aspects (Beware It's Hot!)
What you should know before minting your token.
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One of the questions I received the most since exploring social tokens: “Am I going to go in jail if I create a token for my community?”
The answer is no.
However, before creating a token, there are general rules that you should be aware of if you don't want to have problems regarding the law.
Without further ado, let’s get into it.
First, it's essential to know that the SEC is in charge of regulating decentralized projects.
The Securities and Exchange Commission (SEC) is a U.S. government oversight agency responsible for regulating the securities markets and protecting investors.
It has a three-part mission:
Maintain fair, orderly, and efficient markets
Facilitate capital formation.
They are the ones who’re going to come after you if you’re trying to rug your community, and let me tell you, it’s certainly not what you want.
Ok, so now that we know who’s in charge, let’s see what rules they’ve defined.
The current regulation suggests tokens should have as a main utility to offer fans new experiences within digital economies.
Basically, this means your audience should buy token in hopes of special perks, not financial rewards. A token that delivers promises or implies the possibility of any financial return is much more likely to be a security.
For example, a use case that can have problems with the law could be a social token as an ISA (Income Share Agreement). Offering a slice of your future revenue to token holders can be seen as a security, even though it's one of the most exciting use cases. If you want to create a token to share your future earnings with your community, you should be very cautious and ask a lawyer before doing it.
The regulation is also saying that if a project is raising money selling a token, and the buyers are anticipating profit, chances are it will be considered a Security.
Tokens should rather have as a primary utility to incentive communities thanks to non-economic advantages.
For example, we could think of social advantages, where token holders genuinely do not expect to profit from the tokens and hold them for other reasons such as free access to members-only content, 1:1 call etc.. Even without economic value, your token can have many social values and unlock new experiences that live in your own economy.
Now, of course, if your token has a monetary value, it will be tricky to do so.
In this case, the law suggests to any community leader to clarify that financial value is not the primary purpose of the token, and that token holders have also access to benefits accessible only to them. Basically, make sure to write everywhere all the cool *non-financial* benefits your community will access if they purchase your token.
The regulation finally warns token creators to be careful with False Advertising Issues.
If the token allows fans to access premium experiences, it's absolutely required that those benefits are really *as exclusive* as advertised.
It's also good to remember that it's essential to have Clear Disclosure of Terms like any other reward or loyalty program. People buying tokens should clearly understand what they're buying and how they earn and receive rewards.
In short, the fewer financial rewards involved in your project, the better. Here are some incentives that can be considered as security:
Don't allow your token holders to earn a return for holding your Token.
Don't promise to pay token holders (for work they could do, for example).
Don't allow "Yield farming" or A 'buy-and-burn' models.
There is still quite a bit of a grey area around the legal aspects of Social Token. Still, in general, if the sole use of your Token is to raise money and advertise to buyers that they will earn profits, chances are it will be considered a Security by the Supreme Court.
If you’re interested to learn more about the Infrastructure Bill and how it will affect the crypto space, here are great resources to start with:
If you’re interested to learn more about the legal aspects of Social Token, here are great resources to start with :
If you're looking for peoples and organizations to keep up with the latest legal news in the crypto space, here are great resources to start with :
If they didn't before, Washington now understands the crypto community's power, passion, intensity, and dedication. The crypto community plans to continue to fight to keep Crypto in the US. They're trying to force old rules on top of new technology, and it simply won't work. The crypto space needs new information reporting requirements tailored for crypto companies.
This essay is not legal advice and has the primary purpose of educating you on what you should care about when launching a token.
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