Legal aspects of ICO, IEO, STO


ICO, IEO, and STO have emerged as innovative methods for fundraising within the realm of digital assets, offering new avenues for investment. Despite their potential, these methods come with legal risks that require careful consideration. In this article, we will delve into the legal aspects associated with ICO, IEO, and STO, shedding light on the potential consequences of non-compliance with financial regulations. Understanding these risks is crucial for entrepreneurs and investors to make informed decisions and ensure adherence to relevant legal frameworks in the digital asset space.

 ICO (Initial coin offering)  is a fundraising tool that allows the use of cryptocurrencies at the initial stage of project development. The person/project/investor offers the created tokens for sale to other investors, which creates capital for the company. In fact, ICO allows to raise money, form a material base for the project, and create a community of interested parties around the project. Among the advantages of an ICO are the simplicity of the program implementation, low costs and high liquidity. However, an important disadvantage is the availability of the instrument, which provokes many cases of fraud. ICO allows to avoid a lot of bureaucratic procedures, including passing the Securities Commission.

 IEO (Initial exchange offering) is a subspecies of the ICO procedure, in which control by an authorized body appears. Cryptoproject sells tokens exclusively through exchanges and under its control. The project sells tokens through the exchange; therefore, a fee is charged and the transaction is subject to some kind of structuring. The advantages of IEO include the degree of security, as the transactions take place through the exchange, which ensures the direct transfer of tokens. It is also important that the funds are transferred to investors' accounts, which also reduces the risk of fraud. At the same time, the disadvantage of the method is a lower level of liquidity.

 STO (Security token offering) is an offering of security tokens, also known as "security tokens". The tokens grant various rights within the platform, such as voting rights. STOs simplify the tokenization procedure. In fact, it is the sale of shares under the guise of a tokenized asset, thanks to the transaction the investor becomes the owner of a share in the share capital of the company. Among the advantages are the safety of transactions, as well as the possibility of long-term investments. However, among the disadvantages is lower liquidity, as there are quite serious regulatory requirements.
Choosing the right jurisdiction to conduct token sales is important for several reasons:

  •  Legislation:  it is necessary to make sure that the legislation of the chosen country meets the requirements of the ICO/IEO/STO project and ensures its legal protection.

  •  Taxation:  it is important to consider the specifics of taxation in different countries to avoid additional tax costs.

  •  Competitiveness:  when choosing a jurisdiction, it is necessary to assess its competitive advantages over other countries, such as low transaction fees or high data processing speed.
The issue of CFA is regulated by both domestic legislation of the RK and acts of the AIFC.

The Law of the RK "On Informatization" (hereinafter – Law) in Art. 1 refers cryptocurrency to property and defines the term "digital asset", which means property created in electronic digital form with the use of cryptography and computer calculations, which is not a financial instrument, as well as an electronic digital form of certification of property rights.

Digital assets, in turn, may be either secured or unsecured. In accordance with the provisions of Article 33 of the Law, secured digital assets include digital tokens and other digital assets that are digital means of certifying property rights to goods and (or) services issued (provided) by the person who issued the secured digital asset. In fact, the value of a secured cryptocurrency, for example, directly depends on the real assets. Among unsecured CFAs, it is common to distinguish digital tokens received as remuneration for participation in maintaining consensus in a blockchain in accordance with the procedure established by the laws of the Republic of Kazakhstan.

Kazakhstan's legislator has prohibited the issuance and use of unsecured digital assets in the country, provided that other rules may be established by Kazakhstan law. In addition, this Law states that a digital asset does not give the holder rights to financial instruments and does not give the holder corresponding rights in relation to a legal entity.

ICOs are conducted within the framework of unsecured digital assets, i.e. those assets that have no material basis or guaranteed value. Considering the ban on their circulation in the territory of the Republic of Kazakhstan, ICO is allowed, for example, in the territory of AIFC.

    Among the advantages in this jurisdiction are the following:
    • regulation by the authorities;
    • stimulation of cooperation of all participants of the fintech market;
    • high-quality infrastructure;
    • access to international markets;
    • speed and accessibility of obtaining a crypto license in AIFC.

      Among the restrictions on token turnover in Kazakhstan are the following:
    • prohibition of turnover of unsecured assets on the territory of Kazakhstan;
    • necessity to comply with all AFSA standards and requirements;
    • despite the legislator's focus on developing regulation of CFAs within Kazakhstan, tokenization of assets and token turnover is carried out only in the territory of AIFC.

      Obligations of issuers and investor protection:
    • enforcement;
    • reporting of all transactions with CFA to the Agency for Financial Monitoring of the Republic of Kazakhstan;
    • determination of the period of token issuance on the territory of the Republic of Kazakhstan;
    • determination of the list of rights granted by the digital asset.
Investor Protection.
For example, Amendment No. 9 to the AIFC Market Rules sets out the following provisions for investor protection.

The following information must be specified:

  • The main characteristics of the Security Token, including the rights and obligations conferred by it and details of the Person or Persons responsible for the fulfillment of such obligations and in respect of whom such rights may be exercised.
  • The type of security that the Security Token represents and a clear analysis of the extent to which the Token meets the definition of such type of security.
  • Details of the technology used to issue, store or transfer the security token.
  • How the holder of the security token can exercise any rights conferred by the security token, such as voting or participation in shareholder shares.
  • Additional information if the capital to be raised through the issuance of the security token is used to fund the creation of a new token.
  • How ownership of security tokens is established, certified or otherwise confirmed.
  • Cybersecurity risks associated with the security token or the underlying technology.
  • Other information.

    AIFC is an extremely attractive jurisdiction for ICOs/IEOs/STOs, as it has the most developed legal regulation, creates a favorable environment for operations, and provides investor protection.
A license is required for CFA transactions. In 2020 The Securities and Commodities Authority (SCA) published official rules for ICOs. To organize an ICO, a company needs to obtain a license and register a company.

Depending on the place of registration, the regulations and rules are different. Registration is available in Free Economic Zones, also a company can be based in the mainland. Since 2019, the authorities have allowed companies based in the UAE to launch ICOs. The conditions for this were developed by the ESCA. Many experts advise registration in the DMCC.

Most suitable free zones:

  •  DMCC 
    This zone allows full foreign ownership of the company, benefits in terms of tax obligations and freedom of foreign exchange transactions.

  •  ADGM 
    This zone is particularly favorable for cryptocurrency and fintech activities, actively grants licenses and creates suitable conditions for custodial services.

  •  DTEC 
    Technology startups, accelerator programs, and blockchain innovations are also actively developed within this Dubai zone.

    Peculiarities of regulation:

    The UAE actively develops international cooperation and creates favorable conditions for the development of ICO projects.

    AML/CFT policy requirements and KYC procedure are mandatory for all companies.

    The country has quite a few free economic zones that offer specialized infrastructure. Advantages of free zones:
    • tax benefits;
    • foreign ownership;
    • simplified licensing procedures;
    • technologies adapted to the needs of blockchain.
Investor Protection.
Law No. 4 of 2022, which applies to services using virtual money (exception - DIFC). Based on this law, the VARA regulator provides a regulatory framework for investor protection, creates a list of licensed service providers, and issues licenses to ensure the safety and transparency of companies' interactions with investors (customers).

Examples of successful projects:

Ethereum is a digital currency and a platform for launching decentralized online services based on smart contracts and blockchain technology.

There are 700 projects running on the blockchain of this currency as of 2023. Ethereum provides programmers with tools to create applications based on smart contracts that allow them to set rules for the operation of decentralized exchanges or games.

OneGram is a gold-backed cryptocurrency. The company introduced an innovative idea combining the fundamentals of the Islamic financial system with blockchain technology. The project has raised millions of dollars by offering investors a cryptocurrency backed by the equivalent of one gram of gold for each unit of currency.
Legal framework for token sales in EU countries:

1) DLT Regulation (Distributed Ledger Technology).
2) MiCAR (Markets in Crypto-Assets Regulation).

The European Central Bank takes the position that instruments that have the characteristics of securities should be issued under the rules on public issuance of securities. Under MiCAR, risks are mitigated for those investing in cryptocurrency. It also imposes additional obligations on token issuers. For example:

  • Stablecoins must hold mandatory reserves to cover redemption requests.
  • It is mandatory to provide information on the likelihood of a conflict occurring.
  • Justification of the fair value of stablecoins.
  • Acts:

    • Directive 2009/110/EC of the European Parliament and of the Council of 16.09.2009 on the activities of e-money issuers.

      Under this Directive, e-money is "a digital alternative to cash that allows users to store funds on a device (card or phone) or over the internet and make payment transactions". The key features are:
      • digital storage;
      • exchange for fiat money;
      • acceptance by persons other than the issuer.

    • Directive No. 2005/60/EC on the prevention of the use of the financial system for the purposes of money laundering and terrorist financing.

      This directive is important from the point of view of combating money laundering, as it establishes the legal boundaries of interaction between market participants and customers. Thus, thanks to this directive, the range of obligations of the subjects to take security measures was expanded.

      First of all, a ban on opening anonymous accounts and issuing anonymous bank books was introduced. In addition to this requirement, the range of subjects subject to identification has been expanded: it now includes not only direct customers, but also beneficial owners, which are understood as natural and legal persons who actually control the customer and/or the natural person on whose behalf activities (including transactions) are carried out.

    • Directive 91/308/EEC on the prevention of the use of the financial system for money-laundering purposes.

      Article 2 of Directive 91/308/EEC establishes a prohibition on money laundering: "Member States shall ensure that money laundering is prohibited in accordance with the way in which money laundering is defined in this Directive".

      The Directives define money laundering as an intentional act whereby a person is aware that the "laundered" assets are derived from criminal activity.

    • MiFID (Markets in Financial Instruments Directive) The European Union's Markets in Financial Instruments Directive.

      This directive regulates financial instruments in the EU. The guidelines of this directive are valid and binding for the member states of the European Union.

      The directive provides full protection for exchange players and other participants, protecting them from fraud.

    • MiCAR (Markets in Crypto-Assets Regulation) The purpose of the MiCAR (hereinafter - Regulation) is to regulate all EU member states.

      It creates a single legal framework for the circulation of digital assets in the EU. Within the framework of this Regulation a crypto-asset is "a digital representation of value that can be transferred and stored electronically on the basis of distributed ledger technology or similar technology".

      The provisions of the Regulation apply to utility tokens, EMT and ART.

      Case law:

      Decision of the Court of Justice of the European Union of October 22, 2015 in case C-264/14 Skatteverket v David Hedqvist.

      Case gist: The Swedish Supreme Administrative Court was asked by the Swedish Supreme Administrative Court to provide clarification on the determination of the object of taxation (VAT) in cryptocurrency exchange transactions. Digital money is a generalized concept. Cryptocurrencies are considered a means of payment, but they are not recognized as tangible property, and as a consequence they are not subject to the EU Directive "On the Common System of VAT in the EU". At the same time, the concept of "digital money" is not identical with the concept of "digital assets".

      Thus, in 2015, the European Court of Justice ruled that cryptocurrencies should not be taxable under VAT.
    ICO rules vary significantly depending on the state where the registration is made. There are no rules at the federal level prohibiting ICOs, but it is important to research each individual state's laws.

    Exchanges conducting initial exchange offerings within the meaning of the regulation fall under the Securities Act. This applies if the issuer or purchasers are based in the US. In such cases, a broker-dealer license is required (since the transactions are conducted through an exchange). The license can be obtained from the ATS (Alternative Trading System) or from a national securities exchange.

    Within the framework of STO, the release of CFA takes place in full compliance with the requirements of the legislation, which ensures a high degree of safety.

    Only accredited investors can participate in STO, there is also a census:
    • Annual income of more than $200,000 per person. Net worth in excess of $1 million, which does not include real estate value.
    • An organization that has more than $5 million in assets.
    • A company whose members are all accredited investors.

    It is also necessary to focus on the provisions D, A+ and S of the Securities Act. So, regulation D describes the rules for those wishing to register a cryptocurrency company. The A+ position provides control over the created crypto projects. Regulation S provides an opportunity to raise capital outside the United States.

     The role of SEC: 

    The SEC is the U.S. Securities and Exchange Commission, the primary regulator in the U.S. for cryptocurrency. The Securities Act of 1933 regulates financial instruments that fall under the definition of a security. Thus, such instruments include stocks, bills of exchange, bonds and other securities. There is also the concept of "investment contract", the definition of which appeared in the case of SEC VS W.J. Howey Company and Howey-in-the-securities. Howey Company and Howey-in-the-Hills Service.

    To determine whether an asset falls under the definition of a security, the regulator uses the "Howey Test", which includes 4 criteria:

    • investment of money;
    • reasonable expectation of profit;
    • profits realized through the efforts of others;
    • joint venture.

      This test determines whether an asset is a security and therefore within the scope of the the Securities Act. If an asset is a security, there are a number of requirements for its registration and offering, the failure to fulfill which is often the subject of regulatory action against companies.
    Examples of successful and unsuccessful projects.
    Unsuccessful projects:


    The tokens were sold under the SAFT agreement as an investment contract, therefore subject to registration with the SEC. The court found that the token sale was not registered with the SEC as required by The Securities Act. The company suffered heavy losses due to the failure to comply with the token registration procedures, resulting in severe penalties, including fines, effectively bringing the company to the brink of bankruptcy.

    Successful projects:


    The project provides the opportunity to rent liquidity for decentralized finance sector platforms. The goal of the project is to expand the availability of financial products through the process of tokenization.
    Choosing the right jurisdiction to conduct an ICO is important because different countries have varying degrees of regulation. In addition, some states may have restrictions on the use of cryptocurrencies.

    It is important to take into account that still the circulation of cryptocurrencies is under the scrutiny of legislators in different countries, which requires monitoring regulations, updating information and adapting the business to emerging changes.

    At the same time, despite certain variability, there are already favorable regions (for example, free zones in the UAE), the activities in which are most regulated and protect both the interests of companies and investors.

    Can’t find an answer?

    Leave your e-mail and we will contact you shortly