There is a segment of the cryptocurrency ecosystem that proposes to use the release of custom alternative currencies as a means of funding the development of fledgling Bitcoin-related start-up companies. And why not? It is fast and relatively simple. There are no specific requirements

that the developers warn people about risk, and the business plan can be informal. The creators of the coin are in a position to create excess coins, set a price, and release those coins to the public as a means of raising money. The coins are immediately liquid, ownership is anonymous, and the coins are likely to increase in value, as long as the issuing company honors whatever commitments it has made and develops a viable product.

What's not to like about that system?

The alternative -- issuing shares in a private placement -- is not nearly as attractive, at least at first glance. Compared with issuing coins, the process is slow, complex, and tightly regulated by both State and Federal governments. The company's promoters must develop a detailed business plan, reveal it in detail, and warn potential investors of every conceivable form of risk -- real or imagined. When the shares are eventually released in the Private Placement, they can generally only be sold to wealthy and knowledgeable "accredited" investors (or insiders) and perhaps to a limited number of smaller investors. Every purchaser must apply to the company, and must reveal their identity.  Shares in the private placement are generally not liquid -- sometimes for an extended period of time, and can end up being worthless if the company goes out of business.

It's not a pretty picture.

So, why would any company choose to issue shares when there is such an attractive alternative available?

In my opinion -- an opinion that is informed by ten years experience as a Security Principal for three different securities broker/dealers -- the answer lies in the definition of the word "security". In this case, the definition we are interested in is not "freedom from threat or danger", but the definition that involves investments.

In the United States, the US Supreme Court has ruled (in SEC v. Howey) that a "securities contract" is defined as a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or third party.

Let's briefly look at this definition in terms of the issuance of a cryptocurrency. Let's say that the promoters "pre-mine" or issue a certain number of coins to the company or the development team, and then open up sales to the public. As soon as someone buys those "pre-mined" coins from the promoters, with the expectation that the value will go up, we begin to tread into very dangerous territory. I believe there is a real possibility that the SEC could (and may) take the position that the developers have offered and sold a security. The regulators would make the case that sale of the coin is a "transaction or scheme" where people are investing money (by buying coins), in a "common enterprise" (the business that created and sold the "pre-mined coins) with the expectation that the value of the coins will go up based on the efforts of the "promoters" (the company and its developers).

All it takes is one dissatisfied purchaser, or a high profile scam, to bring this method of funding to the attention of regulators (if they aren't already aware of it).

But wait. What if the developers of the business and coin are incorporated in a jurisdiction outside the United States? Or, what if the business is a Distributed Autonomous Corporation, with no headquarters or jurisdiction anywhere? In either case, if a developer individually, or the "company" as a group sells to US citizens, it will generally need to comply with US laws. And, I think it is fairly clear that it doesn't make any difference if the start-up company's coins were purchased in exchange for another cryptocurrency, like Bitcoin.

What about the case where the company's new currency is not pre-mined (or issued with a reserve for the company)? Here, I think the complexion of the issue changes. If all currency in circulation got created by the efforts of "miners" of the currency, and doesn't directly benefit the company or its members, it seems to me that the definition of security contract no longer applies. On the other hand, this method makes it much harder for the company to raise the development funds it needs.

Many people in the cryptocurrency community chafe at the concept of pre-mining coins from a purely moral or fairness viewpoint. These people seem to object to the idea that the developers should benefit from the work of creating the company. I am not one of those people, because I know how much time, energy, and creativity it takes to develop any kind of business or intellectual property. I believe that the creators and  developers of a successful business deserve to benefit from the work they have put in and the time they have spent away from their families. My objection to pre-mining as a way to fund a company is more of a  practical and legal matter.

For these and other reasons the founders of OmniBazaar have chosen to pursue the harder, more traditional, and legally accepted method of fundraising -- the private placement. We would rather spend the time, effort, and money necessary to comply with the various rules and regulations surrounding a securities offering, than worry about the possible repercussions if we don't.

It's also a matter of protecting the shareholders. Investing in a start-up company is risky enough, without adding the possible risk of a challenge from the SEC for being involved in an illegal securities contract.

On the other hand, I am still studying this issue and reserve the right to change my mind. I would love to see a system developed whereby new companies have a easier and more direct method of raising the money they need to get started. But I also believe that any method that is developed must provide full disclosure and reasonable protections for investors.

None of the above should be taken to mean that OmniBazaar will never issue a custom coin for use in the marketplace network. It just means that we probably won't use this method for funding the development of the company.

UPDATE: There will be a sale event for distribution of OmniCoin utility tokens. This sale event will be conducted by an foreign (non-US) entity and will not be available to citizens or residents of the United States and certain other restricted countries.

Just to be clear, I am not an attorney. So, you can't count on any of this as legal advice. Everything you read above is my own personal opinion.