Monday, May 28, 2018

There are No Such Things as "Free" Airdrops

Recently, as the digital asset industry is coming to terms with the increased regulatory scrutiny of the initial coin offerings, airdropping of tokens to US persons has gained popularity.  The main appeal, apart from the technological ability to widespread the tokens in no time, is the argument that since the tokens are "airdropped" for free, there is no sale of "securities" taking place, and therefore, there is no need to comply with the US securities laws.

Well, I am sorry to disappoint you, but this is a wrong argument to make.  The US securities attorneys will point you to the 1999 SEC release that came out as a result of the so-called "free stock" offerings over the Internet in the late 1990s, well before such concepts of "airdrops" and "digital assets" became household words.  The SEC then brought four enforcement actions against promoters and companies who offered and distributed free stock because they failed to properly register such offerings or qualify them for applicable exemptions.

The SEC Enforcement Director said "Free stock is really a misnomer... . While cash did not change hands, the companies that issued the stock received valuable benefits. Under these circumstances, the securities laws entitle investors to full and fair disclosure ... ."

The release then explains: "In each of the four cases, the investors were required to sign up with the issuers' web sites and disclose valuable personal information in order to obtain shares. Free stock recipients were also offered extra shares, in some cases, for soliciting additional investors or, in other cases, for linking their own websites to those of an issuer or purchasing services offered through an issuer. Through these techniques, issuers received value by spawning a fledgling public market for their shares, increasing their business, creating publicity, increasing traffic to their websites, and, in two cases, generating possible interest in projected public offerings."

As you can see, there is really no such thing as "free" distribution of securities, including digital assets. Even if money does not change hands, issuers that are conducting airdrops are receiving something else that is perhaps more valuable to them at the time: marketing, publicity, visibility, customer base.

Therefore, issuers that are conducting similar free token giveaways should ask themselves a question whether they expect to derive ANY benefits or value from doing this? Would they be doing the airdrops at all if no benefit or value was expected? If the answer is "yes, they expect to receive certain value," then these tokens should be treated as "securities" and be available (even if free of charge) only to verified accredited investors or in a way that is compliant with another available exemption from the registration requirements of the Securities Act.

This article is not legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga.  Ms. Shulga is the co-founder of Ross & Shulga PLLC, a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of corporate and securities law.  She is also a member of Wall Street Blockchain Alliance.

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