5 rules for token launches

This is critical. Projects should apply transfer restrictions to all of the tokens issued to insiders (employees, investors, advisors, partners, etc.), affiliates and anyone that may be involved with the distribution of tokens. These restrictions should apply for at least one year from the token launch.

The SEC has successfully used the absence of a one-year lockup to literally prevent a token issuer from issuing a token. It will likely seek to do this again. Even worse, the SEC’s precedent gives the plaintiff’s attorneys a roadmap for bringing class action lawsuits against companies that fail in this regard. That’s free money for them, and a world a pain for projects.

Ideally, lockups and other appropriate transfer restrictions should only begin to be released at the end of a one-year period, starting with the token launch and following a linear release from that point through the following three years, for a total lockup period of four years. This approach can help mitigate the legal risk described above. It can also position a project to succeed over the long term by reducing downward price pressure on a their token and signaling confidence in its long-term viability.

That’s win-win.

Given these clear benefits, projects should also be wary of investors trying to press for shorter lockups. This type of demand can signal that the investor does not have regard for securities laws, and is likely to sell the token at the first opportunity.

For projects launching tokens outside of the U.S., any tokens issued to U.S. employees, investors, and other insiders should follow this guideline. Teams should discuss with their counsel whether it is necessary to apply lockups more broadly in order to preserve the exemption under Regulation S.

And finally, anyone using transfer-restricted tokens or points as part of their token launch strategy should modify this approach so that any transfer restrictions are not released until one year from the point when the project’s tokens become transferable in the U.S.

The sum up

Applying transfer restrictions for one year from token launch is mandatory. Release schedules that extend at least two or three years after that are good for a project’s insiders, its users, and its future. Anyone who says otherwise may have questionable intentions.

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As we’ve mentioned throughout this series, every token launch is different. But there are a few guidelines that hold true for most projects. Avoiding public fundraising, making a plan for decentralization, enforcing strict communication guidelines, thinking carefully about secondary markets, and waiting at least a year to release token lockups can help projects navigate the most common pitfalls of token launches. Not only that, but sticking to these general guidelines can also help builders reinforce legitimacy, innovate safely, and move the industry forward.

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