ICOs – Do I Need A Special License?

At OCI we incorporate a LOT of ICOs/Token Offering Businesses every month.


By far the most common question we get asked is “Do I need to apply for a Special License For My ICO?”


In summary it comes down to this.:

(a)  If what you are offering is in effect a Security you will need to apply for a Special License in pretty much any jurisdiction you might be thinking of incorporating in.

(b)  If what you are offering would not be classified at law as a Security does the proposed jurisdiction classify a Utility token issuance as a Licensable Activity? If it does then, to incorporate in that particular country, you will need to also apply for the relevant license




In an ICO the Issuing Entity (usually a Company) commonly issues a Token in return for a financial contribution by a third party.


Depending on their function, crypto tokens may be classified as Utility Tokens or Security tokens.


Security Tokens typically require Registration as a Security in the country of the offering entity before same can be offered for sale.


Utility tokens, (also known as user tokens or app coins), entitle future access to a company’s product or service. The defining characteristic of utility tokens is that they are not designed as investments; if properly structured, this feature can exempt utility tokens them from laws governing securities.


By creating utility tokens, a startup can sell “digital coupons” for the service it is developing, much as electronics retailers accept pre-orders for video games that might not be released for several months. (Filecoin, for instance, raised $257 million by selling tokens that will provide users with access to its decentralized cloud storage platform).


Utility tokens however present challengers to Regulators as regards their legal characterization. The nature of a utility token typically is to permit the holder to access a service provided by the issuer’s platform. This is commonly a pre-sale made by a start-up seeking capital to develop the promised service. While token-holder rights bear resemblances to, for example, licensees, franchisees, or club memberships, utility tokens may have other features that lend securities-like properties to them.


What is a Security?


Generally, the term “Security: is used to describe a financial instrument which contains a promise by the issuer, (which is usually a company), to pay the holder of the instrument a defined amount on or by a specified date (this date is when a debt security is said to “mature”), usually with interest.


In the United Kingdom, the term “security” applies only to equities, debentures, alternative debentures, government and public securities, warrants, certificates representing certain securities, units, stakeholder pension schemes, personal pension schemes, rights to or interests in investments, and anything that may be admitted to the Official List.


Some jurisdictions however have given the term Security a very broad definition For example in the USA a Security is defined as “ any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security,” or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing“


The scope of the term “security” has been more extensively explored in the U.S. The most well known case on this point is a decision of the U.S. Supreme Court in SEC v. W.J. Howey Co. (328 U.S. 293 1946) (‘Howey’s case). Howey’s case established that an “investment contract”, which is one type of security as defined by the Securities Act of 1933, means “a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party”


If the Token you are offering clearly operates like equity or debt (via payments, voting rights, etc), then almost certainly your Token would be classified as  Security.


Under Hong Kong Law the concept of what is a Security, is in general consistent with best international practices that prohibit accessing public capital unless registration or authorisation requirements are complied with or a relevant exemption applies. The Securities and Futures Ordinance (‘SFO’) s definition of “security” provides little assistance in relation to tokens that do not clearly fall into pre-established categories, such as shares or debentures. In Hong Kong an  entitlement to participate in a Collective Investment Scheme (“CIS”) ” can also be considered a Security That said the definition of “collective investment scheme” (‘CIS’), is widely drafted and remains open to interpretation in its application.




In short if a crypto token derives its value from an external, tradable asset, it would be classified as a security token.


Specifically if a Token promises the holder the right to share in the profits of and or management of the issuing Company, or a relative thereof, almost certainly such an offering would be considered a Security and would need to be registered as such in the proposed country of incorporation.


If, however, what you are offering is but a Utility Token then in 90% of tax free or law tax jurisdictions (eg Hong Kong, Seychelles, Belize, Nevis, Panama, Dominica etc) you should not need to apply for any form of Special License.


That said certain jurisdictions have decided to specifically make Utility Token Offering ICOs a licensable activity. These jurisdictions currently include Gibraltar and Malta. Hence if you intend to incorporate in one of these jurisdictions (even if what you are offering is not a Security) you will need to apply for an ICO License.


If you are about to launch an ICO and are in any doubt about your licensing obligations/requirements you should seek legal advice in the proposed country of incorporation, prior to launch.


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