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Utility Token Sale: Key Features, Legal Requirements, Prominent Examples

Among all existing ICO models, a utility token sale is the most popular one. This article answers the key questions about utility tokens and utility token sale procedures.

What are utility tokens in a nutshell?

A utility token is a blockchain-based cryptographic token that represents a right of a token holder to access the project’s platform, product, or services. Utility tokens don’t constitute an investment contract. They are often called appcoins, app tokens, and access tokens.

According to Balaji S. Srinivasan, CTO of Coinbase, the best analogy to utility token concept is the concept of paid API keys required to access a platform or service.

What are the features of utility tokens?

There are several most distinctive features of utility tokens:

  • First and foremost, a utility token should be useful inside the platform or other system in question.
  • A utility token doesn’t constitute a security.
  • A utility token doesn’t offer any speculative interests, although its price can increase along with the demand for the service or product in question.
  • A utility token is transferable, therefore it should be listed and available for trading on cryptoexchanges.

Simply put, such tokens should not constitute any characteristics of securities, while having certain clear uses within the issuer company’s product.

What are the examples of utility tokens?

Tokens of Storj and Filecoin projects grant the right to rent hard drive space. Meanwhile, holders of IExec RLC and Golem tokens can rent and use computational power.

First Blood tokens give their holders the right to access a computer gaming platform, play and witness eSport games, host games and tournaments, and earn tokens from referrals. Edgeless tokens enable their holders to play in Edgeless casino.

Sometimes cryptocurrency startuppers go all the way when conceiving new ways to use their tokens. For example, SpankChain tokens give access to adult content.

What is a utility token sale, after all?

A utility token sale is a process of selling blockchain-based digital tokens, which are to be used for accessing the project’s platform or services, for cryptocurrencies like BTC or ETH or fiat money.

In legal terms, the token seller, a company issuing utility tokens and holding an ICO, passes title to such tokens to the buyer, the ICO participant, for a consideration called price under the sale and purchase agreement published on the seller’s website.

From a legal perspective, purchasing utility tokens is not that different from ordering groceries from your local grocery store.

What are the biggest utility token sales?

Many big ICOs were utility token sales. Here are the most successful of them:

  • EOS, a platform for DApp development, raised around $4.2B.
  • Tezos, another platform for building DApps and smart contracts, has raised $232M.
  • Bancor Protocol, a decentralized liquidity network enabling users to convert tokens into other tokens, has collected $153M.
  • Polkadot, a protocol allowing independent blockchains to exchange information, received about $145M during the token sale.
  • Status, the mobile Ethereum client, has attracted $107M from contributors.

Thus, just these five ICOs have raised over $4.8B, which is more than a third of all funds ever raised using a utility token sale model. According to Coidesk’s ICO tracker, it is more than a third of all funds ever raised via an ICO.

What are the legal requirements for utility token sale?

There are not that many specific regulations for utility token sales. Commonly, jurisdictions set more broad requirements for such procedures such as:

  • KYC (Know Your Customer) policy. Projects issuing digital tokens are obliged to verify the identities of all token sale participants by collecting their personal information.
  • AML (Anti-Money Laundering) and CTF (Counter-Terrorism Financing) Rules. These are the sets of requirements aimed at preventing terrorism financing and legalization of money obtained from criminal activity.
  • Incorporation requirements. A project that is going to conduct a token sale has to set up a company for token sale purposes and maintain a registration office in the country of incorporation.
  • Taxation. Funds received in exchange for the sold tokens may be subject to taxation in the project’s country of incorporation.

Nonetheless, many countries are already developing regulations regarding the entire token sale concept.

Can a project sell utility tokens while the platform is still in development?

Generally, a project cannot sell utility tokens before its platform or product is released, as in this case such tokens are likely to be deemed securities. Some projects sell SAFTs (Safe Agreements for Future Tokens) for their tokens to a restricted group of investors in order to avoid regulatory complications. There is another legal framework called RATE (Real Agreement for Tokens and Equity), however it still should be tested out.

Can a project sell security tokens?

The short answer is “yes”. A project may opt to issue and sell security tokens and undertake a security token offering, which is a whole different ICO model we will describe in the upcoming articles. However, a compliant security token offering requires more effort, as the offering should be in line with the existing securities legislation.

What are Terms of Token Sale?

Terms of Token Sale (or Token Sale Conditions) is an agreement governing the sale of tokens. Legally, terms of token sale is a simple sale and purchase agreement with all stipulations inherent in such agreements. By purchasing tokens, or by explicitly stating their consent, a buyer agrees with all the given terms, just like in case of any other sale and purchase agreement.

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