by Cindy Huynh
Blockchain projects are continuously announcing giveaways which include a lot of free tokens. While it appears a clever marketing strategy, some wonder whether this new approach is actually legal.
Preference to ICOs
According to Fortune, a blockchain project called Dfinity recently announced a giveaway of $35 million of their digital tokens. Civil, journalism-on-a-blockchain project, and Everipedia, a competitor to Wikipedia will also conduct their own airdrops.
The tactic has become one of the most viable and popular ways to introduce blockchain projects to the community. The strategy does not come as much of a surprise either; regulators have become quick to pounce on new and emerging ICOs. It has thus become safer for these companies to give away free tokens than undergo an ICO.
Although airdropping prevents companies from raising significantly large funds, it allows blockchain-based projects an opportunity to sell their reserve tokens to the secondary market. Airdrops also aid with the network effect that is vital for blockchain-based projects to grow.
“Airdrops combine the best of paid referral programs with stock options,” said Brayton Williams from Boost VC.
“Potential users get paid for joining or using the network and have the potential upside if the network increases in value.”
Are Airdrops Legal?
While the strategy appears relatively effective, attorneys who understand securities law, believe that airdropping is, “not really” legal.
“There’s a line of cases saying it’s not limited to money,” said Sam Waldon, an attorney with Proskauer. “It can be something of value, or goods or services. From the SEC’s perspective, the [token recipient] might be giving the issuer something of value by becoming part of network.”
According to Blake Estes of Alston & Bird, the SEC has discouraged and even disagreed with companies who have in the past, attempted to increase investor interest by providing free giveaways. For example, in 1999, the SEC agency began to crack down on companies that offered “free stock” to attract investors to Internet companies.
While the SEC has not addressed the legal nature of airdrops, Chairman Jay Clayton previously released a speech that spoke of the US’s tough stance on ICOs and any companies venturing into the space.
Ousting U.S. Citizens from Airdrops
Dfinity has therefore found a way around their situation by excluding people from the US from their airdrop. While this approach works for many companies, it, however, is not a viable option for Civil. Civil’s blockchain journalist company is focused on towns and cities in the U.S. The blockchain-based company is, therefore, facing a dilemma where it’s extremely difficult to distribute their tokens to the right audience.
While the SEC’s firm stance on ICOs is protecting retail investors from the myriad scams on the internet, it is also hurting blockchain innovation in the U.S., especially since most blockchain-based companies are no longer including the American public in their ICO campaigns.