For all the hype in the digital currency world about so-called initial coin offerings, U.S. investors often can't officially participate.
The reason, several analysts told CNBC, is companies' fear of being held accountable by the U.S. Securities and Exchange Commission in case buyers lose money in what can be a frenetic rush for something with unproven dollar value and sometimes prone to fraud.
"Everyone's afraid of the SEC. They can reach anyone in the world," said William Mougayar, author of "The Business Blockchain" and organizer of the Token Summit, a conference in New York this May about the digital coin business.
Not letting U.S. residents participate is a way for firms "to protect themselves because the SEC won't go after the customers, they'll go after the companies," Mougayar said.
The SEC declined to comment.
Before buying one of these new digital coins — based on the same blockchain technology as — an investor typically must check a box that says he or she is not a U.S. citizen or green card holder. The coin sale websites also usually block U.S.-based computers based on their IP address.
Bitcoin has more than doubled in value this year, while the market value of all digital currencies has more than quadrupled this year, hovering around $80 billion, according to CoinMarketCap.
Screenshots of webpages for DAO.Casino (left) and EOS token sales
Source: DAO.Casino, EOS
An initial coin offering is a way for blockchain-based projects to raise funds, while allowing investors to own part of it through a digital network token. However, since most of the projects are still in very early stages, some worry about the rapid speed at which some projects are raising large amounts of money. About half of this year's roughly $1.2 billion in initial coin offerings was raised in the last month alone, according to a July report from financial research firm Autonomous NEXT.
Last Thursday, the Tezos blockchain project set a record for the coin sales by raising the equivalent of more than $200 million over the 13 days of its fundraiser. Switzerland-based Tezos said it did not specifically exclude investors from any country from participating.
U.S. residents holding bitcoin or ethereum could buy the Tezos tokens. But they couldn't participate in the fundraiser through its broker, Bitcoin Suisse.
"Due to the uncertainty with regard to crypto-assets and crypto-financial services from U.S. authorities, the IRS, and the FATCA [Foreign Account Tax Compliance Act] treaty, we are at this time unable to offer our services to U.S. clients," Bitcoin Suisse CEO Niklas Nikolajsen told CNBC in an emailed statement.
The challenge for token sale regulation comes down to uncertainty over how the definition of a security applies to the digital coins. Right now, the SEC's definition relies on the "Howey test," which came out of a 1946 U.S. Supreme Court case. The ruling says a security involves the investment of money in a common enterprise, in which the investor expects profits primarily from others' efforts.
Part of the debate is whether coin buyers are merely buying the tokens like a stock, in expectation they will rise in value, or are actually holding the tokens as a way to participate in a blockchain project. If the token is considered to be more like a stock, then the sellers need to be registered with the SEC. Otherwise the sale may be illegal.
"The lack of clarity is certainly a problem, certainly for any institutional investors to get used to this space," said Ryan Schoen, senior financial services policy analyst at research firm Washington Analysis. "This is similar to the '90s when the internet came into existence."
The SEC has not been completely silent on cryptocurrencies. The regulator issued in 2014 an "investor alert" about bitcoin that said "using Bitcoin may limit your recovery in the event of fraud or theft."
The SEC is also clearly watching the token sales. Although not an official view, Valerie Szczepanik, head of the SEC's distributed ledger group, said at a bitcoin conference in May that companies creating and issuing tokens to raise funds are responsible for protecting their investors, according to a Reuters report.
"It is harder if you are a U.S. entity to do an ICO, but it's not impossible," said Jim Yang, chief strategy officer at Tendermint, which is developing some major components behind a blockchain project called Cosmos to address problems in bitcoin and ethereum. "The U.S. is very highly regulated," Yang said, noting some of the issues can be mitigated by not naming a fundraiser an ICO.
He said his firm worked closely with a lawyer in Cosmos' own fundraiser of $17 million in early April so that all U.S. residents, except those from two states, could participate. "We just want to be on the super safe side, that we follow all the possible ways a law can twist," Yang said.
Not all initial coin offerings have gone smoothly, and digital currency enthusiasts are also interested to see how well the blockchain projects are able to execute on their business proposals.
On Monday, the CoinDash initial coin offering lost $7 million to hackers. The digital currency trading platform said it will still give coins to investors who sent funds to the fraudulent account before the website was shut down.
A rush of buyers for other coin offerings this year also clogged the network of digital currency ethereum, causing volatility for the currency, which itself has run up exponentially this year.
"It's the responsibility of the participants to check if it's legal" to invest in the token sale, Johann Gevers, founder and president of the Tezos Foundation, said. He noted that young blockchain projects like Tezos typically can't afford to spend "millions and millions" for legal research into every country and, in the case of the U.S., every state.
To be sure, keeping U.S. investors out of token sales doesn't guarantee safety for a company, said Marco Santori, who leads the fintech practice at law firm Cooley. He's advised many initial coin offerings, although he said he can't speak to specific ones.
"Every other country in the world has some kind of securities law," Santori said, "so just because you're trying to avoid the U.S. securities law it doesn't mean you [avoid] the rest of the world's securities law."
Some developers are also tapping alternative fundraising methods.
"We think ICOs will go away. We think the SEC will come down on this," said Marshall Hayner, co-founder of Metal Pay, a blockchain-based app similar to Venmo.
Rather than opening the initial coin offering to the public, Hayner said his firm did a $3 million round of token sales that was limited to "accredited" investors, or those with a personal relationship with the firm. "There will be more tokens that are certainly trying to go accredited only," he said.