What We Talk About When We Talk About Security Tokens

July 11, 2018  |   By: Max Dilendorf, Esq., Rika Khurdayan, Esq. And Gleb Zaslavsky, Esq.

With the rapid development of the virtual-token market over the last few years, it should come as no surprise that the way in which people talk about virtual tokens is in flux. Some common phrases have come to mean different things to different people. But that fact makes talking about virtual tokens accurately and effectively more difficult and serious misunderstandings too easy.

Because of the risk of misunderstanding, those of us who work in the blockchain field should be more mindful of how we use certain terms in the blockchain context. Toward that end, below are some thoughts on the terms “security token” and “security token offering.” These phrases have the potential to seriously mislead, and so should be used with precision and clarity:

  • Security token means a virtual token that represents ownership of an asset, debt, equity in a business, or profit-sharing right. Investment token is an apt alternative. But the term does not mean any virtual token that qualifies as a security under U.S. law (many utility tokens do, too), or a token sold in compliance with securities regulations (as all tokens should be).
  • Security Token Offering (STO) refers to an initial coin offering (ICO) involving security tokens, not one that complies with securities law. Also, some have suggested that “ICO” should be used only to refer to offerings of utility tokens, but such a distinction would perpetuate the myth that utility tokens are not securities under U.S. law.

In short, we should be careful to clearly draw the distinction between utility tokens and security tokens based on their uses, not their legal status. The former really does distinguish the two types of tokens, but the latter does not.

Blockchain technology is still young, and new terminology that helps us talk about it is inevitable. But in developing and using that terminology, we must think carefully about how well it conveys our meaning and whether it risks sowing confusion among our readers or listeners.

This article is provided for your convenience and does not constitute legal advice. The information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Prior results do not guarantee a similar outcome.

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Max Dilendorf, Esq.

Max Dilendorf’s practice is focused primarily on digital assets, cryptocurrency, and technologies that drive blockchain and related distributive computing networks. An early adopter of virtual currency and associated legal, financial, and business implications, Max is considered the go-to expert for anything ...

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Bari Zahn, Esq.

Bari Zahn has nearly 20 years of experience practicing at global law firms in New York. Bari has represented a broad array of multinational clients on U.S. and cross-border transactions. She has supervised legal teams worldwide and has extensive management experience as the Founder, former CEO and General ...

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Adam Pollock

Adam is one of the nation’s leading young whistleblower lawyers.  He brings with him a special ability not just to litigate, but to investigate – and understand – complex organizations and transactions.  His extensive familiarity with tech issues is built on a computer science degree and work as a ...

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Steve Cohen

Steve contributes extensive business and problem-solving experience to challenges that may require litigation – or may help avoid it.  Indeed, his perspective on litigation is influenced by his experience as a three-time internet start-up CEO.

Steve served on Ronald Reagan’s 1980 presidential campaign ...

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Pamela A. Fuller, Esq.

Pamela A. Fuller is a corporate and international tax attorney, with over two decades of experience.  She advises a wide range of clients–including private and public companies, joint ventures, private equity and hedge funds, C-Suite executives, private U.S and foreign individual clients, and government ...

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Ivanna Korniiuk

Ivanna has 7 years of law practice in Europe, namely in the field of corporate law, M&A transactions, banking and finance. As a senior associate, she advised local, EU, US and multinational clients with respect to their business activities in Ukraine.

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