The Israel Securities Authority has recently published its interim report and is recommending lenient regulations for initial coin offerings (ICOs), including a clear definition of what separates a so-called "utility token" from a security.
The committee distinguishes between a cryptocurrency used exclusively as a means of exchange and a token, which it defines as a "special cryptocurrency conferring rights in a specific venture." With respect to tokens, the committee also distinguishes between a security token or an investment token - "a token that confers ownership rights, participation, or membership in a specific venture, or rights to future cash flow from such a venture," and a utility token - "a token that confers usage rights in a product or service offered by a specific venture."
The committee further recommends "considering the use and extension of special existing and future capital raising tracks for ICOs, including consideration of lenient regulation for ICOs on a limited scale; the option of raising capital through cryptocurrencies on crowdfunding platforms; establishing a temporary framework for trial ICOs and advising entrepreneurs in this context on a format of a regulatory sandbox; and consideration of the possibility of relying on foreign regulation applying to cryptocurrencies in this matter."
According to the ISA report, a utility token that "confers usage rights in a product or service offered by a specific venture" shouldn't necessarily be deemed a security. Neither should tokens that are used solely for clearing, exchange or payments for a specific project, the report said.
However, a utility token might be a security if the cryptocurrency isn't controlled by a cohesive party, such as the startup itself, and if it can be used for payments beyond the initial venture.
For example, if someone tried to fundraise for a private company by issuing a new general-purpose cryptocurrency similar to bitcoin, that might be a security token, in the agency's view.
The committee's interim report states, "If ICOs are held according to a prospectus, it will be necessary to adjust the disclosure requirements in the Securities Law to the special characteristics of this category, as was done with other spheres of activity (real estate, oil and gas, medical companies, etc.)"
The committee also states, "The question of whether a cryptocurrency offering constituting a security is regarded as an offering to the public shall be considered according to the characteristics of the offering. An offering shall not be considered an offering to the public if its characteristics clearly indicate that it is not meant for the public in Israel (for example, according to the language of the offering and the absence of marketing, advertising, and appeals to investors in Israel). The committee is also considering the question of whether it is necessary to adapt the existing tests for the offering to the distributed and inter-territorial character of ICOs."