The Coin-To-Company Model: Reconciling Decentralized Governance With Securities Regulation Through Structural Separation and Complementary Exemptions Under U.S. Law | Molecule
The Coin-To-Company Model: Reconciling Decentralized Governance With Securities Regulation Through Structural Separation and Complementary Exemptions Under U.S. Law
A novel legal framework, the Coin-to-Company model, reconciles the structural & governance innovations of blockchain-based organizations with the requirements of U.S. securities law.
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86 min read
•Benjamin Snipes
Abstract
This Article proposes a novel legal framework, the Coin-to-Company (“C2C”) model, that reconciles the structural and governance innovations of blockchain-based organizations with the substantive requirements of U.S. securities law through categorical separation and complementary use of established regulatory exemptions. The model addresses a fundamental tension in digital asset regulation, which is how to enable broad-based community participation and decentralized governance through token distribution without triggering securities law compliance obligations, while simultaneously creating compliant pathways for value realization through traditional corporate equity structures.
Rather than attempting to resolve this tension through novel legal theories such as relying on indefinite concepts of “sufficient decentralization” or temporal transformation of securities, the C2C model maintains clear categorical distinction between tokens distributed as utility or community instruments (the “coins”) and equity securities issued through established exemptions by a traditional operating company. Tokens never represent investment contracts; equity never dilutes token utility.
The model achieves this through:
a dual-organization structure familiar in crypto comprising:
a US LLC with C Corporation tax election (“LabsCo” or “DevCo”) for business operations and equity issuance; and
a decentralized autonomous organization (a “DAO”) that is strictly used for token holder community organization, related IP assignment, and token owner advocacy for project participation and guidance, which may optionally be organized around a legal entity such as an association or foundation.
a permissionless token locking mechanism offered by DevCo that functions as technical identity infrastructure and eligibility credential that grants no corporate rights explicitly per the DevCo’s operating agreement.
documented pathways for locked token holders to petition the company for equity under company-administered plan and approved pathway such as: (a) Regulation D pathways for equity sales to accredited investors; (b) Reg S; (c) Reg CF/A for crowdsales; or (d) Rule 701 pathways for compensatory equity grants to advisory contributors, intellectual property providers, and employees.
DevCo shareholders use locked tokens to perform corporate functions such as voting on major corporate matters. Locked token holders may also participate in voting, but only identified shareholders’ locked token votes are binding for purposes of DevCo actions.
About the author
Benjamin Snipes
Benjamin Snipes (JD, MBA, LLM) is based in the U.S. He has over 20 years of experience advising clients in international taxation, securities law, and emerging technologies.
The model is particularly timely given regulatory developments signaling acceptance of token-security distinctions. The proposed Responsible Financial Innovation Act recognizes decentralized governance systems and “ancillary assets” while creating clear commodity jurisdiction for digital assets. The current SEC Chairman Paul Atkins’ Project Crypto framework proposes distinguishing digital commodities, digital tools, and digital collectibles from securities based on functional characteristics rather than form.
This Article demonstrates that the C2C model, by carefully operationalizing these distinctions through documented legal structures, provides a defensible, immediately implementable framework for projects seeking to build token-based communities while maintaining regulatory compliance and enabling institutional capital participation.
I. Introduction
A. The Regulatory Paradox
Since the Securities and Exchange Commission’s 2017 Report on The DAO, digital asset regulation has been characterized by what might be termed a “regulatory paradox”: the law’s ostensible hostility toward decentralization conflicting with its theoretical neutrality toward technological innovation.
The paradox manifests in multiple ways. First, the Howey test—articulated for decidedly non-technological investment arrangements in SEC v. W.J. Howey Co., a 1946 case concerning orange grove investments has been applied with remarkable consistency to fungible digital assets, despite the profound structural and economic differences between orange grove sale-leasebacks and blockchain protocols. The test’s focus on “efforts of others” has proven difficult to apply in decentralized systems where no identifiable “other” manages the network, and where protocol improvements emerge from distributed developer communities rather than centralized management.
Second, the regulatory response to digital assets has historically depended more on the specific characteristics of distribution arrangements than on the functional nature of the assets themselves. The same token distributed through a private placement to accredited investors might constitute a security, while the identical token distributed decentrally to thousands of network participants might be characterized as a commodity—despite fundamental economic equivalence. This form-over-substance approach creates perverse incentives: projects are encouraged to conduct rushed, risky decentralizations rather than carefully planned network launches, simply to evade securities classification.
Third, the historical regulatory approach has forced projects into false choices: either conduct an unregistered securities offering by raising capital through token sales, or spend years and substantial resources launching tokens through offshore vehicles and geofencing the United States, trying to achieve “sufficient decentralization” before further regulatory scrutiny, which is a threshold whose definition remains frustratingly vague. A middle path enabling compliant community formation through utility token distribution while allowing subsequent, explicitly disclosed equity participation opportunity and traditional capital formation much like any other startup company, has been largely unavailable.
This regulatory environment has had concrete consequences. The initial coin offering (ICO) market, which raised approximately $13.3 billion in 2018, collapsed following sustained SEC enforcement actions establishing that most ICOs constituted unregistered securities offerings. Subsequent token distribution approaches, including Simple Agreements for Future Tokens (“SAFTs”), demonstrated only marginally greater longevity. The SEC v. Telegram enforcement action established that pre-sales do not insulate subsequent token distributions from securities scrutiny if the overall scheme involves unrestricted public distribution.
Crypto projects have increasingly gravitated toward a dual structure comprising an offshore foundation (such as in the Cayman Islands or Switzerland, or as a Swiss association (Verein)) holding crypto assets for the unincorporated DAO of token holders, combined with a U.S.-based “LabsCo” or “DevCo” that performs all traditional corporate activity. This positioning allows the DAO to operate outside the jurisdictional reach of U.S. regulators, thereby minimizing exposure to U.S. securities laws and enforcement actions. Meanwhile, the U.S.-based entity functions as the operational arm, undertaking substantive business operations and programming, which equity is held by venture capitalists and the centralized, founding team. This separation aims to achieve a balance between operational efficacy and regulatory compliance, but has inevitably created friction between token holders who expect value to accrue to the tokens and the DevCo that has fiduciary responsibility to its shareholders.
Meanwhile, the unincorporated decentralized autonomous organizations of token holders and their often adjacent foundations and associations, have developed without clear legal structure, exposing participants to general partnership liability and creating practical difficulties in contracting, owning property, and conducting business operations. Recent litigation has confirmed that courts will apply traditional entity classification frameworks to DAOs regardless of their technological structure, often with outcomes adverse to participants who believed themselves protected by decentralization.
B. Why Prior Approaches Failed
Understanding the C2C model requires first understanding why previous attempts to reconcile tokens and securities regulation have proven inadequate.
1. The ICO Model’s Deficiency
The initial coin offering represented an attempt to apply venture capital’s most successful distribution mechanism, the equity offering, directly to tokens. Projects would conduct public offerings of tokens, raising capital before networks were operational, and promising that proceeds would fund network development. The model failed because it was securities distribution in all respects except nomenclature. Token purchasers made investments (transferring consideration); in a common enterprise (the token project); with expectations of profits (token appreciation); derived from the efforts of others (the development team). The SEC’s application of Howey was straightforward, particularly when promoters discussed profits expectations related to the tokens.
2. The SAFT/Pre-Sale Model’s Deficiency
In response to ICO enforcement, practitioners developed Simple Agreements for Future Tokens (“SAFTs”). The theory held that the pre-sale agreement was clearly a security—a contract for future token delivery was unquestionably an investment contract. But the subsequent delivery of tokens on a decentralized network, the theory went, would not be a securities distribution because networks would be functional and participants would no longer expect profits from entrepreneurial efforts.
The Telegram enforcement action demolished this approach. The SEC established that the overall scheme—pre-sale agreements combined with planned public token distribution—constituted a unitary offering that could not be bifurcated through temporal separation. More problematically, the agency treated planned secondary resales into the U.S. market as part of the offering, suggesting that U.S. securities restrictions apply to subsequent trading irrespective of whether initial distribution was offshore.
3. The Sufficient Decentralization Model’s Deficiency
Some projects have attempted to solve the securities problem through network decentralization. The theory, supported by statements from former SEC officials, holds that once a network achieves sufficient decentralization—such that control and profits no longer depend on the efforts of a centralized promoter—tokens may be distributed without securities registration because purchasers no longer reasonably expect profits derived from others’ efforts.
While certain frameworks to decentralization have been proposed in pending crypto legislation, this approach based on current US law faces several critical deficiencies, which recent legislative proposals have struggled to overcome. First, the decentralization standard itself is vague and undefined, with no clear metrics or thresholds. Second, achieving genuine decentralization before distribution creates a chicken-and-egg problem: how can networks be decentralized without broadly distributed tokens, and how can tokens be distributed to achieve decentralization without conducting a securities offering? Third, the approach depends on regulatory discretion and agency statements rather than statutory or regulatory authority, creating significant enforcement risk. Fourth, the theory assumes that temporal transformation—that a security can become a non-security—is feasible, but subsequent research suggests this transformation is far more complex than initially theorized.
C. The C2C Model as Synthesis
The Coin-to-Company model attempts to address these deficiencies through categorical separation rather than temporal transformation.
The fundamental proposal is simple: project tokens and equity serve different yet complementary purposes and should never be conflated. Project tokens provide community membership, governance technology, and other non-investment utility. They can be distributed to raise money through sales for that utility without becoming investment contracts, with clear disclosure to purchasers regarding what would be required if they were to obtain equity from the project’s DevCo through established exemptions.
The same person may participate in both project token and equity ecosystems—indeed, the model encourages this, but through distinct, separately documented agreements with different legal bases. Tokens are never marketed as investments or proxies for equity. Equity is never presented as merely an option on tokens or a conversion mechanism. However, the tokens and their associated blockchains form the underlying technological infrastructure for performing the corporation’s legal manifestation, obligations, and agreements.
This separation is achieved through:
(1) Dual-Entity Architecture. A traditional LLC with C-Corp election (again the “DevCo” or “LabsCo”) creates and distributes tokens, conducts all business, and issues equity to qualified equity holders. And a decentralized autonomous organization of tokenholders (again the “DAO”), which may be embodied by or adjacent to an association or foundation established in a jurisdiction, organizes the token holder community, assigns related IP, and provides immediate utility to token holders in coordination with the DevCo. The two entities maintain legal separation while their participants overlap. Since the DAO does not hold any treasury, transmit any value, or have any binding governance over the DevCo, the veil piercing sensitivity is vastly reduced.
(2) Token Locking as Technical Infrastructure. Rather than creating a contractual bridge between tokens and equity (which risks options classification), the model uses voluntary token locking to signal commitment and provide further, non-binding participation and community capabilities to the locked token holders. Title of the tokens never transfers from the token holder to the DevCo – the locking mechanism is a temporary “hold” or escrow arrangement. Once locked, locked token holders may vote on all DevCo proposals and corporate actions, but only those locked token holders who are shareholders, as described below, will have their votes be counted as binding as dictated by their related share class. Only the DevCo knows which locked token holders are shareholders or not.
(3) Community Participation in Company Proposals and Major Actions. Tokenholder input and oversight through non-binding voting is an attractive feature for projects as it aligns with the decentralized ethos of crypto-based blockchain community building and enhances stakeholder engagement without conferring traditional shareholder rights. This mechanism allows tokenholders to influence project direction and decision-making, fostering a sense of community ownership and participation akin to the role of customers or users in traditional corporate governance. By tokenizing public input, projects enable a broader range of voices to be heard, leveraging the collective intelligence and interests of the community to guide development and operational strategies. This approach not only democratizes decision-making but also reinforces transparency and accountability, features that are particularly valued by other stakeholders, including investors. The model parallels what DAOs are already implementing in relation to DevCos, where tokenholders not only contribute to the project in meaningful ways but also influence its direction through collective action without needing to hold equity, thereby creating a novel form of corporate stakeholder engagement. This approach also finds support in analogous structures, such as the SEC's no-action letter regarding the Green Bay Packers, Inc., where the Commission recognized that certain participation rights held by non-shareholders need not trigger securities classification where such rights do not convey meaningful control or financial interests in the enterprise.
(4) KYC/AML and Equity Petition. While locked or unlocked token holders have no rights to any equity, a locked token holder may voluntarily undergo traditional KYC and AML background screening. If such screening does not result in a reason that the locked would be disqualified from ever becoming a DevCo shareholder, then that locked token holder may petition the DevCo to become a shareholder under one of the DevCo’s current equity sales or participation plans.
(5)Equity Participation. The DevCo at its discretion and according to its plan, may grant through separate, documented investment or compensation agreements, which would typically be done under one of the following paths:
(a) Regulation D/S/CF/A for Investor Equity. Capital-providing investors receive equity through Regulation D private placements using established Rule 506(b) or 506(c) exemptions, or through other established exemptions such as Regulation S, Regulation CF, or Regulation A.
(b) Rule 701 for Compensatory Equity. Community participants who provide genuine services—advisory consultation, intellectual property development, and/or promotional activities (an “AIPP” agreement)—may receive equity under Rule 701’s compensatory exemption.
(6) Execution of Corporate Actions via Locked Tokens: When a holder is both a locked token holder and a shareholder, with each such share associated with a holder’s locked token, then the locked token holder may vote on corporate matters with the locked tokens with binding effect as provided by the DevCo’s Operating Agreement. From the general public’s perspective, all locked token holders may vote on DevCo’s proposals, but only the DevCo knows which of those votes with locked tokens are binding because they were made by shareholders.
This combination of organization and use of tokens ensures that: tokens are never presented as securities or investment contracts; equity is always issued through compliant, documented pathways; community participation is not restricted to accredited investors; decentralization can proceed naturally without artificial acceleration to achieve securities exemption; and institutional capital can participate through traditional equity mechanisms, thereby creating crypto-based enterprises that can integrate with traditional industries.
II. The C2C Model Architecture
This paper now goes deeper into the C2C model architecture to discuss its opportunities, limitations and tradeoffs.
A. Dual-Entity Structure
The C2C model at its core attempts to integrate the traditional DAO, whether offshore or not, with the operating DevCo or LabsCo. It attempts to make conducting ordinary business with traditional organizations easy, while retaining the inclusive community building, fast and effective revenue generation, and decentralized infrastructure of crypto. This structure also attempts to set the DevCo up well to use all of the future anticipated crypto-based infrastructure for corporate management, such as for IP management, real world asset tokenization, self-custody of digital financial assets, and efficient money transmission.
1. The Decentralized Autonomous Organization (“DAO”)
The DAO in its proposed ideal form is organized as a U.S. unincorporated nonprofit association, established under Delaware or Wyoming law. Delaware’s Uniform Unincorporated Nonprofit Association Act defines such an entity as “an unincorporated organization consisting of two or more members joined by mutual consent for a common, nonprofit purpose,” and can be created by simple agreement for no fee rather than registration with the state. However, the DAO, which at its core is simply the universe of token holders, does not require any governmental entity.
The DAO, particularly when organized as an UNA or DUNA, serves three limited but critical functions:
First, liability protection. By organizing token holders as members of an unincorporated nonprofit association, the structure shields individual token holders from general partnership liability that would otherwise attach to informal associations engaged in for-profit activity. Delaware law provides that “[a] member or agent of an unincorporated nonprofit association is not liable for a debt, obligation or liability of the association solely by reason of being a member or acting as an agent of the association.”
The Samuels v. Lido DAO litigation demonstrates the acute risk facing unstructured DAOs. A California federal court held that Lido DAO constituted a general partnership under California law, exposing venture capital investors to joint and several liability for DAO obligations simply through their governance participation. An unincorporated nonprofit association avoids this outcome by providing a recognized legal entity with limited liability for members.
Second, IP assignment vehicle. The DAO membership agreement provides that any intellectual property created by token holders as voluntary contributions to the DAO is automatically assigned to the DAO, which then voluntarily contributes such IP to DevCo. This creates a clear chain of title for project intellectual property while maintaining legal separation between token holders (DAO members) and equity holders (DevCo shareholders). Importantly, these IP contributions are voluntary and gratuitous—they create no expectation of financial return and thus avoid investment contract characterization, forming a “negative right” for token holders.
Third, interest group and advocacy organization. The DAO serves as an organizational vehicle for token holder advocacy, community management, and coordination on matters affecting token utility and network development. This function is explicitly non-commercial and nonprofit, consistent with the nonprofit association structure.
Critically, the DAO does not hold material assets beyond nominal treasury for administrative functions if any. Conducting business operations; employing personnel; entering material commercial contracts; or distributing profits to members are functions reserved exclusively to DevCo.
2. The Development Company (DevCo) or Labs Company (LabsCo)
DevCo/LabsCo is ideally organized as a Delaware LLC with C Corporation tax election. This structure provides:
Corporate tax treatment for potential Qualified Small Business Stock (QSBS) benefits under IRC § 1202, allowing shareholders to exclude 50-100% of capital gains on equity held for three to five years if certain requirements are met. For stock issued after July 4, 2025, shareholders may exclude up to $15 million in capital gains (indexed for inflation) or 10 times their adjusted basis, whichever is greater. Organizing as a US company also avoids CFC status for US based shareholders, which would create onerous tax compliance and income inclusion issues for US persons.
Traditional corporate governance under well-established Delaware law, providing clarity for institutional investors and alignment with standard venture capital documentation.
Full operational capacity to conduct business, employ team members, hold intellectual property, enter contracts, and issue securities under established exemptions.
DevCo performs all substantive business functions: creates and distributes project tokens as utility assets; develops protocol and application software; holds and monetizes project intellectual property; employs team members and engages contractors; raises capital through equity offerings; and generates revenue and manages treasury.
The critical structural principle is that DevCo creates and distributes tokens, but token ownership conveys no equity or financial interest in DevCo. Token distribution is a commercial transaction, a sale of utility, and not an investment transaction. Tokens grant DAO membership automatically upon acquisition, but DAO membership conveys no economic interest in DevCo’s business or profits.
B. Token Economics and Utility
Project tokens (“$TOKENs”) serve defined non-financial functions within the C2C framework:
1. DAO Membership Credential
Tokens ownership automatically confers DAO membership pursuant to the DAO articles and membership agreement. This membership is:
Automatic: No separate registration or consent required
Revocable: Transferring or burning tokens immediately terminates membership with no further obligation
Non-economic: Membership conveys no profit participation, dividend rights, or liquidation preferences
The DAO membership provides token holders with organizational infrastructure for community advocacy and coordination, but creates no financial rights against DevCo or any other entity or each other.
2. Network Utility
$TOKENs provide functional utility within the protocol or application ecosystem, which may include:
access to DevCo platform features or services;
payment mechanism for on-chain transactions to acquire DevCo products;
governance participation in protocol parameter decisions; and
identity and reputation signaling.
The specific utility varies by project but must be genuine, disclosed, and non-financial in character. Tokens function as commodities or consumptive goods, not investment instruments. This characterization finds support in United Housing Foundation v. Forman, where the Supreme Court emphasized that instruments purchased for “a desire to use or consume” rather than for investment purposes are not securities.
3. Locked Token Functionality
$TOKEN holders may voluntarily lock their tokens with DevCo’s smart contract infrastructure, creating “Locked Tokens” (“L-$TOKENs”). This locking mechanism serves two critical functions:
Technical identity infrastructure. Locked tokens provide DevCo with a cryptographic means of identifying community members for purposes of shareholder voting, dividend distributions, and other corporate actions conducted on-chain. This is purely technical and locking creates no legal rights.
Eligibility signal. Locked tokens demonstrate commitment to the project and DevCo can create specific forums and events for locked token holders who have elected to engage with the project at that level. However, again, locking creates no automatic right to equity, no option to purchase equity, and no enforceable claim against DevCo.
Token locking is voluntary and reversible. Token holders may unlock tokens at any time unless they have received equity, in which case tokens must remain locked for the duration of equity ownership to maintain alignment between on-chain identity and legal shareholding.
C. The Non-Option Nature of Locked Tokens
A critical legal question is whether locked tokens constitute “options” under federal securities law, which would bring them within the definition of securities and trigger registration requirements. The C2C model is specifically designed to avoid option characterization.
Under established precedent, an instrument constitutes an option if it has: (1) determined quantity; (2) determined price; and (3) no obligation on the option holder to perform. Locked tokens fail the first two requirements:
No determined quantity. When a token holder locks tokens, DevCo retains full discretion regarding whether to issue equity, and if so, in what amount. There is no formula, conversion ratio, or predetermined quantity of equity associated with locked tokens. DevCo’s board may reject equity applications entirely, issue nominal amounts, or issue substantial amounts based on the contributor’s value to the project—all at DevCo’s sole discretion.
No determined price. Locked tokens do not establish a strike price or exercise price for equity. If DevCo chooses to issue equity to a locked token holder, the equity may be issued: (a) as compensatory grants under Rule 701 with no monetary consideration; (b) through Regulation D purchases at fair market value determined by DevCo’s board; or (c) through other exemptions at terms negotiated separately. The locked tokens themselves do not create any pricing term.
No enforceable right. Token locking creates no contractual right to equity. A locked token holder cannot compel DevCo to issue equity or to honor any implied commitment. DevCo’s decision to issue equity is entirely discretionary.
This structure deliberately avoids the option analysis established in cases such as Gwozdzinsky v. Zell-Chilmark Fund, which required both fixed quantity and price for an instrument to qualify as an option. Moreover, the locked tokens do not meet the definition of stock options under Lucente v. IBM, which requires “its own strike price and its own option period.”
III. C2C Operational Mechanics
A. Project Launch and Token Distribution
The C2C model contemplates a specific launch sequence designed to maintain clear separation between token distribution and equity offering:
Step 1: Entity Formation
Founders establish DevCo as a Delaware LLC with C Corporation tax election and simultaneously establish the DAO as an unincorporated nonprofit association. The DAO articles and membership agreement are publicly accessible and clearly state that token ownership conveys DAO membership but no economic interest in any entity.
Step 2: Token Creation and Whitepaper
DevCo creates tokens and prepares a detailed whitepaper disclosing:
The dual-entity C2C structure
Token utility and functionality
Clear statement that tokens are not securities or investment contracts
Clear statement that no securities are being offered at the time of token sale
Explanation of the locked token mechanism
Description of potential future equity pathways (Rule 701, Regulation D, etc.) that are not being currently offered
DevCo’s intended operations without financial projections
Comprehensive risk disclosures
The whitepaper is critical under the C2C model since it establishes from inception that token purchasers are buying utility, not securities, and that any subsequent equity opportunity is entirely separate, discretionary, and subject to securities law compliance.
Step 3: Token Distribution
DevCo can distribute the tokens through various mechanisms such as direct sales for fiat or crypto; airdrops to community members, early supporters, or ecosystem participants; liquidity mining rewards for protocol participation; or service provider compensation for contributions to ecosystem development, or via third parties, such as non-profit organizations that may sell the tokens as part of their own fundraising efforts.
All token distributions are documented as commercial transactions with clear disclaimers that tokens convey no equity, profit participation, or investment rights to avoid confusion with past token classification. Proceeds flow to DevCo for business operations, or may be directed for specific activities such as research and development.
Step 4: Secondary Market Trading
Tokens trade freely on decentralized exchanges or centralized platforms as commercial commodities. DevCo does not maintain lockup restrictions or transfer limitations (except for any tokens held by DevCo itself, which may be subject to release schedules for treasury management purposes).
The token’s secondary market price is determined by market forces such as supply and demand based on utility value, network effects, and third-party speculative interest, and not by DevCo’s entrepreneurial efforts or promises. This market determination is critical for commodity characterization and finds support in SEC v. Ripple Labs, where “programmatic sales” on exchanges were deemed not to be securities offerings because buyers’ profit expectations were based on general market dynamics rather than the issuer’s specific entrepreneurial efforts.
B. The Equity Bridge: From Tokens to Shares
The C2C model’s most innovative element is the structured pathway from token holder to equity holder, designed to enable community members to obtain ownership stakes without creating investment contract liability for the token itself.
Step 1: Token Locking
Token holders who wish to engage more deeply with the project and potentially receive equity may voluntarily lock their tokens through DevCo’s smart contract infrastructure. Locking demonstrates commitment, enables DevCo to identify committed community members, provides technical infrastructure for on-chain shareholder interactions, and creates eligibility to apply for equity.
Importantly, locking is non-binding. Token holders may unlock at any time before receiving equity. Locking creates no obligation on DevCo and no enforceable right for the token holder.
Step 2: KYC/AML Screening
Locked token holders who wish to apply for equity must complete DevCo’s Know Your Customer (“KYC”) and Anti-Money Laundering (“AML”) screening. This serves multiple functions: ensures compliance with securities law purchaser qualification requirements; enables DevCo to verify accredited investor status where required; satisfies FinCEN requirements for crypto-related businesses; and establishes the identity of potential shareholders for corporate records.
Only natural persons, and their related entities as applicable, who successfully complete KYC/AML may proceed to equity application. This requirement ensures DevCo can satisfy its obligations under securities regulations, and as may be needed to verify ultimate beneficial owners of the DevCo.
Step 3: Equity Application and Approval
Locked token holders who complete KYC/AML may apply for equity through one of DevCo’s approved pathways. DevCo’s board reviews applications and may approve or deny them in its sole discretion.
The application process is documented and formal. There is no automatic conversion, no guaranteed approval, and no formula determining equity amounts. DevCo evaluates each applicant based on various factors including: contributions to the ecosystem; professional qualifications and expertise; alignment with project values and long-term vision; available equity pool under the applicable exemption; and overall cap table management considerations.
This discretionary review is critical since it ensures that equity issuance is based on substantive contributions or capital provision, not merely on token ownership.
Step 4: Equity Issuance Under Applicable Exemption
If approved, DevCo issues equity through one of three primary pathways, each with distinct legal bases and requirements:
Pathway A: Regulation D Private Placement
For investors providing capital to DevCo, equity may be offered through Regulation D private placements, typically using Rule 506(c), though given that locked token holders would be known to the DevCo, 506(b) could also be explored. While Reg D purchasers must be accredited, the benefits of the Rule 506(c) including general solicitation, state preemption, and no fundraising cap. The purchase would be documented through a Stock Purchase Agreement entirely separate from token ownership, though it may be Ricardian and recorded on-chain in some embodiment. Token locking may be a prerequisite for participating in the offering, but the tokens themselves are not consideration for the equity; equity purchasers provide new capital for the equity. In fact, investors need not handle tokens or manage crypto wallets at all. The DevCo could execute a proxy agreement with the investors to lock and vote the tokens on behalf of the investors much like any other corporate proxy agreement.
Pathway B: Other Sale Exemptions
DevCo may also utilize:
Regulation S for offshore offerings to non-U.S. persons
Regulation CF for crowdfunding offerings (up to $5 million annually)
Regulation A for scaled offerings (Tier 1 up to $20 million, Tier 2 up to $75 million annually)
Each exemption has specific requirements regarding purchaser qualifications, disclosure obligations, and procedural compliance. The key principle remains constant: equity is issued through documented, compliant securities transactions entirely separate from token ownership.
Pathway C: Rule 701 Compensatory Grants
For community members who have provided or commit to provide genuine services to DevCo, equity may be issued under Rule 701 as compensatory equity. Rule 701 of the Securities Act provides an exemption from registration for securities issued “pursuant to certain compensatory benefit plans and contracts relating to compensation.” The DevCo would enter into and maintain written Advisory, Intellectual Property, and Promotion (“AIPP”) agreements with each locked token holder who was being compensated with DevCo equity, which describes the services provided, compensation terms, and equity grant details. These agreements would clearly specify that equity is issued for services, not in exchange for tokens or as a conversion of token value.
Services qualifying for Rule 701 could include: advisory services (strategic guidance, technical consultation, business development advice); intellectual property contributions (software code, research, protocol designs, technical documentation); and promotional activities (community building, educational content, ecosystem development).
Rule 701 requirements further include:
Written compensatory plan or individual compensation agreement documenting the services and equity terms
Bona fide services not related to capital raising
Aggregate sales limits: Within any 12-month period, the aggregate sales price or amount of securities sold may not exceed the greatest of: (i) $1 million; (ii) 15% of the total assets of the issuer; or (iii) 15% of the outstanding securities of the class being offered
Disclosure requirements: If aggregate sales exceed $10 million within 12 months, the issuer must provide disclosure documents to recipients
Natural persons only: Recipients must be natural persons providing services (not entities)
However, it is important to note that at the earliest stages of company formation prior to any 409A valuation if equity is not being granted subject to any restriction, as is often the case with early token launches, the relative value of common equity is usually considered close to par value. And since 2012, there is no limit on the number of persons who can receive equity for compensatory purposes under Rule 701 that itself would trigger registration.
C. Dual Participation: Token Holder and Shareholder
Once a locked token holder receives equity, they then occupy dual roles:
As DAO Member (by virtue of token ownership):
Vote on DAO community matters;
Participate in protocol governance (if tokens grant governance rights);
Support DevCo through the DAO’s advocacy function; and
Contribute IP to DAO (and thereby to DevCo) voluntarily.
As DevCo Shareholder (by virtue of equity ownership):
Vote on corporate governance matters under Delaware law;
Receive dividends if and when declared by board;
Participate in liquidation proceeds per equity terms; and
Exercise appraisal rights, inspection rights, and other statutory rights
These roles are legally distinct. Token ownership does not convey shareholder rights, and share ownership is not contingent on continued token holding, though locked tokens must remain locked while shares are held, to maintain on-chain identity infrastructure.
DevCo may conduct shareholder votes, distribute dividends, and manage other corporate actions on-chain by referencing locked token addresses as described in DevCo’s Operating Agreement. The locked tokens serve as cryptographic identity credentials, but the underlying legal rights derive from share ownership documented in DevCo’s cap table, not from token possession.
D. Exit and Liquidity
The C2C model contemplates multiple liquidity pathways for both tokens and equity:
Token Liquidity
Tokens (unlocked $TOKENs) trade freely on secondary markets as commodities. Token holders who have not received equity face no transfer restrictions, holding periods, or resale limitations. The token’s market functions independently of DevCo’s equity capitalization.
Equity Liquidity
Shareholders are subject to standard securities law holding periods and transfer restrictions:
Rule 144 holding period: Typically 6-12 months for restricted securities purchased in private placements
Rule 904: For securities sold offshore under Regulation S, a distribution compliance period (typically 6 months for reporting issuers, 12 months for non-reporting issuers) must elapse before resale into the U.S. market, during which time the securities must remain offshore
QSBS holding period: Three to five years for 50% to 100% capital gains exclusion under IRC § 1202 as amended by the OBBB (if qualifying conditions are met); and
Contractual restrictions: Right of first refusal, co-sale rights, and other standard venture capital provisions per DevCo’s operating agreement and investment documents.
Upon completing the applicable holding period and satisfying transfer requirements, shareholders may sell equity through secondary markets for private company shares, tender offers organized by DevCo, strategic acquisitions of DevCo, or traditional IPO if DevCo reaches sufficient scale.
When a shareholder sells equity, their locked tokens ($L-TOKEN) are automatically unlocked and exchanged for freely tradable tokens ($TOKENs). This maintains the principle that locked tokens serve as technical infrastructure for equity holders—once equity is transferred, the locking function is no longer necessary.
Real-World Asset Tokenization
DevCo may also pursue on-chain representations of equity or other corporate assets once regulatory frameworks permit: security tokens representing equity ownership; dividend tokens providing on-chain distribution of profits as stablecoins; royalty tokens representing contractual revenue-sharing arrangements; and debt tokens for tokenized bonds with programmatic repayment.
These innovations would occur within the C2C structure, with proper securities law compliance and clear disclosure of the legal nature of each digital asset.
IV. C2C Legal Compliance Framework
A. Securities Law Analysis
The C2C model’s central legal proposition is that tokens are not securities, while equity clearly is. This section analyzes that distinction under the Howey test and related precedent.
1. Tokens Are Not Investment Contracts
Under SEC v. W.J. Howey Co., an instrument is an investment contract if it involves: (1) an investment of money; (2) in a common enterprise; (3) with an expectation of profits; (4) derived from the efforts of others.
C2C tokens fail multiple prongs of this test:
No Common Enterprise: Token purchasers are not entering a common enterprise with DevCo. They are buying a utility good or commodity. The purchase is very explicitly by the terms of the accompanying whitepaper, a commercial transaction, not an organizational joining. While token purchasers may hope the protocol succeeds and tokens appreciate much like the purchasers of any new technology, there is no pooling of assets, no pro-rata sharing of returns, and no organizational structure uniting token holders with DevCo in a profit-seeking venture.
Under vertical commonality analysis (the standard in most circuits), there must be a direct correlation between the success of the promoter’s efforts and the investor’s returns. Token holders’ returns (if any) derive from secondary market dynamics, which may vary depending on supply and demand based on network usage, speculative interest, and macro market conditions, and not from DevCo’s entrepreneurial success per se. Many if not most token purchasers never intend to nor ever will become shareholders. DevCo’s profitability and token market price are not mechanically linked.
No Expectation of Profits From Others’ Efforts: The critical Howey prong is whether purchasers have a reasonable expectation of profits derived from the entrepreneurial or managerial efforts of the promoter or third party.
C2C tokens avoid this characterization through several mechanisms:
First, utility disclosure. The whitepaper should clearly articulate token utility and disclaim investment characteristics. Tokens are marketed as functional goods, not securities. As the Supreme Court recognized in United Housing Foundation v. Forman, instruments purchased for consumptive use rather than profit expectation are not securities.
Some utility features of the non-locked token may include, product discounts, early access to new product launches, token-gated exclusive products, subscription priority and preferential pricing. For R&D oriented businesses, as most startups are, tokens may provide token-gated access to certain research results, Real-time study updates before non-token holder disclosure, pre-publication review of research manuscripts, priority enrollment in community trials and product testing, NFT badges documenting research participation, and participant recognition in research acknowledgments.
Locked tokens could be further structured to provide token-weighted forum access with enhanced privileges, DevCo proposal submission rights (minimum threshold required), detailed quarterly reports on operations and development, token-gated AMA sessions with scientists and DevCo advisors, even more exclusive community event invitations, and access to the advisory governance voting interface (non-binding) by locking.
Second, decentralized value drivers. Token value (to the extent it exists) derives from network effects, ecosystem adoption, and decentralized development as is true for all other tokens trading within crypto ecosystems, and not primarily from DevCo’s efforts. Once the protocol is launched, DevCo is one of many contributors. Value accrues through community participation, third-party application development, and organic network growth.
Third, no promises of profit, particularly from others. DevCo makes no representations regarding token appreciation, return on investment, or profit participation. The whitepaper includes prominent disclaimers that token purchase is for consumptive use only, speculative, tokens may lose value, and there is no expectation of returns.
Fourth, separate, well disclosed equity pathway. By clearly disclosing from inception that equity, and not tokens, provides investment exposure to DevCo’s success, the model channels investment expectations to the appropriate instrument. Purchasers who want an investment buy equity. Purchasers who want utility or speculative commodity exposure buy tokens. Others can work for it as a DevCo team member or via an AIPP agreement.
Comparison to Ripple: The Southern District of New York’s decision in SEC v. Ripple Labs supports this analysis. The court held that Ripple’s “programmatic sales” of XRP on digital asset exchanges were not securities offerings because retail purchasers did not know they were buying from Ripple, could not reasonably expect profits from Ripple’s efforts specifically, and the transactions were “blind bid/ask transactions” indistinguishable from secondary market purchases.
C2C secondary token sales are analogous: DevCo initially sells tokens as utility/commodity goods through disclosed, arms-length transactions in the ways described. Secondary purchasers may hope tokens appreciate, but that expectation is tied to market demand for the utility or speculative interest in the asset class, or correlation with the trading of other related assets, like the secondary sales of any other goods produced by any other company.
2. Locked Tokens Are Not Securities
Locked tokens present a closer question. As discussed in Section II.C, locked tokens fail the test for options because they lack determined quantity and determined price. They fail Howey for the same reasons as unlocked tokens—there is no common enterprise, and any profit expectation is not derived from DevCo’s efforts but from the separate decision to issue equity (which itself is a securities transaction with proper compliance).
Locked tokens are technical infrastructure. They function similarly to a customer loyalty card or access credential—they signal eligibility for a separate benefit (equity application), but they do not themselves embody a financial interest or legal claim.
3. Equity Is Clearly a Security
DevCo’s equity is unambiguously and explicitly a security under both the enumerated categories (stock) and the investment contract analysis. This is not controversial. The C2C model does not attempt to avoid securities classification for equity, but instead, it ensures equity issuance occurs through compliant exemptions such as Regulation D for private placements to investors, Rule 701 for compensatory issuances to service providers, and other exemptions as applicable. Each issuance is documented, disclosed, and conducted under established frameworks with decades of regulatory guidance and case law.
B. Anti-Money Laundering and KYC
DevCo’s KYC/AML obligations arise from multiple sources:
1. FinCEN Registration
If DevCo engages in money transmission (broadly defined to include exchanging/administering virtual currency for fiat or other virtual currency), it must register with FinCEN as a Money Services Business and comply with Bank Secrecy Act requirements. The C2C model contemplates FinCEN registration if DevCo’s activities trigger coverage, but expects most would not.
2. KYC for Equity Issuance
Even absent money transmission obligations, DevCo must conduct KYC for equity recipients to: verify accredited investor status for Regulation D offerings; maintain accurate cap table records; comply with tax reporting requirements (issuing K-1s or 1099s as applicable); prevent fraudulent or anonymous equity ownership, and perform OFAC screening. The C2C model integrates KYC as a mandatory step before equity application, ensuring compliance with these requirements.
3. No KYC for Token Purchasers
Importantly, DevCo does not impose KYC on token purchasers (unless required by other regulations such as money transmission or exchange operator licensing). This distinction reinforces the commodity characterization: tokens are purchased anonymously like any commodity, while equity requires identity verification like any security.
C. Tax Considerations
The C2C model’s tax treatment involves multiple layers:
1. DAO Tax Status
The DAO’s tax status would depend on how it is structured. If unorganized, given that it holds no treasury nor transmits any value, it would typically not trigger any tax filing obligation, and would otherwise be treated as a pass-through. The C2C model is designed such that the DAO has no material income or assets: tokens are owned by members individually, not by the DAO entity; IP contributions to the DAO are voluntary and gratuitous, not income-generating; and the DAO conducts no business operations. Thus, the DAO should have no taxable income to pass through to members. The DAO exists purely for liability protection, IP assignment, and organizational purposes, not as a tax entity.
2. DevCo Tax Status
DevCo elects C Corporation tax treatment. This creates: entity-level taxation on DevCo’s income; potential QSBS benefits for shareholders under IRC § 1202; and separate corporate identity for tax purposes, with DevCo filing its own returns and shareholders receiving K-1s or 1099s.
The C Corporation election must be made before issuing equity to preserve QSBS eligibility. For stock issued after July 4, 2025, qualifying shareholders may exclude up to $15 million in capital gains (indexed for inflation) or 10 times their adjusted basis, whichever is greater, for stock held at least five years. Stock held for at least three years but less than five years qualifies for partial exclusion.
3. Token Purchase/Sale Tax Treatment
Token purchases and sales are treated as commodity transactions: purchasers have no immediate tax liability (absent income characterization for airdrop/reward receipts); sales generate capital gain or loss based on holding period and basis; and no “wash sale” rules apply (unlike securities). This treatment is advantageous for token holders compared to securities taxation.
4. Equity Grant Tax Treatment
Rule 701 equity grants trigger IRC § 83 analysis, the full analysis of which falls outside this paper.
5. Reg D/S/CF/A Equity ax Treatment
Equity purchases for fiat or crypto under Regs D/S/CF/A do not trigger immediate income recognition since purchasers have cost basis equal to purchase price and recognize gain/loss only upon sale.
V. C2C Regulatory Context and Timing
The C2C model’s viability depends significantly on the regulatory environment. Recent developments suggest a shift toward recognition of token-security distinctions.
A. The Responsible Financial Innovation Act
The proposed Responsible Financial Innovation Act (“RFIA”) by the Senate Banking Committee, along with the House’ older CLARITY Act, represents the most comprehensive Congressional attempt to establish a crypto regulatory framework. Key provisions relevant to the C2C model include:
1. Ancillary Asset Definition
RFIA creates a category of “ancillary assets” as intangible assets (including digital commodities) offered through an investment contract but which do not themselves provide financial rights such as debt interests, equity interests, liquidation rights, or profit participation. Once the investment contract relationship terminates, ancillary assets trade as commodities outside securities regulation.
This framework closely aligns with the C2C model’s core principle: tokens may initially be distributed through arrangements involving investment contracts (though the C2C model avoids this characterization), but the tokens themselves are not securities and may trade freely once any investment contract relationship ends.
2. Decentralized Governance Systems
RFIA explicitly recognizes “decentralized governance systems” as transparent, rules-based systems for protocol development in which, “participation is not limited to, or under the effective control of, any person or group of persons under common control.” Critically, RFIA states that decentralized governance systems may be implemented through, “a decentralized unincorporated nonprofit association created pursuant to State law, provided that the legal entity does not operate pursuant to centralized management.”
This provision directly validates the C2C model’s use of an unincorporated nonprofit association as the DAO structure. It confirms that such entities can serve governance functions without triggering securities treatment, provided they avoid centralized management.
3. Disclosure Requirements
For ancillary assets that were initially offered through investment contracts, RFIA imposes ongoing disclosure obligations on the “ancillary asset originator.” However, these obligations terminate once the originator certifies that: (i) it has not engaged in more than nominal entrepreneurial or managerial efforts during the preceding year; and (ii) any essential promises made to purchasers have been fulfilled.
The C2C model could utilize this framework: DevCo initially distributes tokens with full disclosure of the C2C structure and separate equity pathways, then files a termination certification once the protocol is sufficiently mature and decentralized. Thereafter, tokens trade as commodities with no ongoing issuer disclosure obligations. But the C2C model does not rely on this ancillary asset originator framework either, and recent guidance suggests Congress does not expect it will be in any finally passed crypto legislation in any event.
4. Safe Harbors for Gratuitous Distributions: Limitations on C2C Applicability
RFIA Section 4B(a)(5) provides that certain "gratuitous distributions"—specifically automated, protocol-level distributions pursuant to transparent, non-discretionary rules—are not offers or sales of securities. This safe harbor applies to programmatic distributions such as:
Staking rewards automatically distributed by consensus mechanisms
Protocol-based airdrops executed by smart contracts according to transparent, predetermined criteria (e.g., all holders of X token receive Y amount)
Usage-based rewards distributed algorithmically based on verifiable network participation
The statute requires distributions be "broad, equitable, and non-discretionary" and specifies that "no person or group has unilateral authority to alter, restrict, or direct the issuance parameters."
Importantly, this safe harbor likely does NOT apply to DevCo's centralized token distributions including:
Discretionary airdrops where DevCo selects recipients or determines allocations on a case-by-case basis
Direct token sales conducted by DevCo (these are commercial transactions, not gratuitous distributions)
For DevCo-level distributions not covered by RFIA safe harbors, the C2C model relies on alternative legal frameworks:
(a) Direct Sales at Fair Market Value: DevCo's sale of tokens for fiat or cryptocurrency at commercially reasonable prices constitutes a sale of utility goods/commodities, not an investment contract, provided tokens have genuine consumptive use and are not marketed with profit expectations.
(b) Rule 701 Compensatory Grants: Tokens distributed to service providers under written agreements documenting bona fide services may qualify for Rule 701's compensatory exemption (subject to applicable limitations).
(c) Traditional Howey Analysis: DevCo distributions not qualifying for statutory safe harbors must be analyzed under traditional investment contract doctrine, with the C2C model relying on: (i) genuine utility and consumptive use characteristics; (ii) clear disclosure of the C2C program and if and when an investment contract or equity grant could be formed; (iii) clear and extensive disclaimers that tokens convey no equity or financial rights, and what would be required to have any such rights; (iv) secondary market price determination by market forces rather than DevCo's entrepreneurial efforts; and (v) separation between token utility and equity value.
Hybrid Structure: Projects may implement a hybrid approach where:
DevCo-level distributions (e.g., initial sales, discretionary allocations) rely on separate exemptions or non-security characterization
This bifurcation preserves the benefits of automated, decentralized token distributions while accommodating DevCo's need for operational flexibility in business development and community building, but would be optional for a project to pursue.
B. SEC Project Crypto
In November 2025, SEC Chairman Paul Atkins outlined “Project Crypto,” the Commission’s initiative to provide regulatory clarity for digital assets. Chairman Atkins’ remarks are highly relevant to the C2C model:
1. Token Taxonomy
Chairman Atkins proposed a formal token taxonomy distinguishing:
Digital Commodities: Network tokens deriving value from decentralized, functional systems rather than managerial efforts
Digital Tools: Utility tokens providing access to applications or services
Digital Collectibles: NFTs and similar assets tied to artwork, in-game items, or other collectible content
Tokenized Securities: Digital representations of traditional securities
Only tokenized securities are subject to securities regulation under this framework. The other three categories are not securities, though they remain subject to anti-fraud provisions.
The C2C model’s tokens clearly fall within “Digital Commodities” or “Digital Tools” under this taxonomy. They provide protocol utility, community participation rights, and network access, and not financial interests in DevCo’s profits or assets. Critically, even where DevCo maintains centralized control over protocol development and token-related features, the tokens remain Digital Commodities or Digital Tools because they are purchased and held for consumptive utility rather than investment purposes. The tokens provide tangible, non-financial benefits including: community participation capability and organizational infrastructure through DAO membership; network access and protocol interaction rights; product access and preferential pricing or discounts on DevCo offerings; exclusive token holder forums and communication channels; the ability to lock tokens and thereby gain enhanced engagement opportunities and direct voice in DevCo proposals (though non-binding for non-shareholders); token-gated content, events, and experiences tailored to the project type; and whatever additional utility features the specific company implementing the C2C framework chooses to provide (which may include research access for biotech projects, governance participation for infrastructure protocols, loyalty benefits for consumer applications, or fan engagement for entertainment properties).
These utility characteristics, not the degree of centralization in protocol management, determine whether tokens constitute securities. Under United Housing Foundation v. Forman and its progeny, instruments purchased for consumptive use rather than profit expectation are not securities regardless of whether the provider maintains control over service delivery. A movie theater ticket provides access controlled entirely by the theater operator, yet it is not a security because purchasers seek entertainment consumption, not investment returns. C2C tokens function similarly: they provide access to a suite of participation rights and utility features controlled by DevCo, but purchased for consumption and engagement rather than financial return.
2. Investment Contracts Can Terminate
Chairman Atkins emphasized that “investment contracts can end,” such that tokens initially sold through an investment contract may subsequently trade outside securities regulation once the issuer’s essential managerial efforts cease. This principle validates the temporal distinction between initial distribution (which may involve investment contract analysis) and subsequent trading (which may not).
The C2C model goes further: it avoids the investment contract characterization entirely for token distribution, ensuring tokens never require transformation from securities to commodities. But Chairman Atkins’ framework provides additional comfort that even if tokens were initially securities, they would not permanently carry that characterization.
3. Regulation Crypto Proposal
Chairman Atkins previewed a forthcoming “Regulation Crypto” proposal establishing tailored disclosure, exemption, and safe harbor provisions for crypto asset distributions. While details remain pending, the proposal is expected to create compliance pathways for projects that distribute tokens alongside or following investment contract arrangements.
The C2C model’s disclosure-heavy approach—detailed whitepaper, clear separation between tokens and equity, explicit disclaimers, documented exemptions for equity—aligns with the anticipated Regulation Crypto framework.
C. Judicial Developments: Ripple and Lido
The two prominent, crypto-related court decisions we have discussed earlier in this paper provide important context for the C2C model, and are explored deeper here:
1. SEC v. Ripple Labs
The Southern District of New York’s July 2023 decision distinguished between “institutional sales” of XRP (conducted through written contracts with sophisticated buyers) and “programmatic sales” (blind bid/ask transactions on digital asset exchanges). The court held that institutional sales were investment contracts because buyers knew they were transacting with Ripple, expected profits from Ripple’s efforts, and contracts included investment-like terms (lockups, resale restrictions).
By contrast, programmatic sales were not investment contracts because: (i) buyers did not know they were purchasing from Ripple; (ii) less than 1% of XRP trading volume came from Ripple’s sales; and (iii) buyers’ profit expectations were based on general market dynamics, not Ripple’s entrepreneurial efforts specifically.
The C2C model applies this lesson: DevCo’s token sales are disclosed, arms-length transactions for utility goods without lockup or investment-like terms. While purchasers know DevCo is the seller (distinguishing from Ripple’s programmatic sales), they also know they are buying utility/commodity, not an investment. The detailed whitepaper disclaimer and separate equity pathway channel investment expectations away from tokens, as well as explicit discussion of the C2C model that the DevCo intends to follow that provides clear guidance on when an investment contract could actually be formed.
2. Samuels v. Lido DAO
The Northern District of California’s November 2024 decision held that Lido DAO, an unstructured organization of token holders operating an Ethereum staking protocol, constituted a general partnership under California law. The court rejected Lido’s argument that it was “just autonomous software,” finding that the DAO “makes decisions through tokenholder votes, maintains a treasury where it keeps its retained percentage of staking rewards, and has hired over 70 employees.”
The court further held that venture capital investors who participated in Lido’s governance were general partners, exposing them to joint and several liability for the DAO’s obligations—including potential liability for offering unregistered securities.
The C2C model directly addresses the Lido problem: by organizing token holders as members of an unincorporated nonprofit association (rather than an informal general partnership), the structure provides liability protection for members under Delaware law. Moreover, by separating business operations (DevCo) from community organization (DAO), the model ensures that the DAO does not engage in for-profit activities that would create partnership obligations.
The Lido decision validates the C2C model’s architectural choice: unstructured DAOs face acute legal risk, while properly organized entities can provide both functionality and protection.
VI. Conclusion
The Coin-to-Company model offers a practical synthesis of decentralized governance and securities law compliance. Rather than forcing projects into false choices, like offshore structures, rushed decentralization, or regulatory uncertainty, the C2C model enables domestic projects to distribute tokens as utility assets while channeling investment capital through compliant equity pathways.
The model’s durability derives from its reliance on established legal frameworks: unincorporated nonprofit associations for liability protection, commodity transactions for token distribution, and settled securities exemptions (Rule 701, Regulation D) for equity issuance. It does not depend on novel legal theories, agency discretion, or evolving judicial interpretations of “sufficient decentralization.”
The regulatory environment is becoming more receptive to token-security distinctions. The Responsible Financial Innovation Act would codify many of the C2C model’s core principles, recognizing decentralized governance entities and ancillary assets that function as commodities. SEC Chair Atkins’ Project Crypto framework similarly distinguishes digital commodities from securities based on economic reality and taxonomy. And recent judicial decisions (Ripple, Lido) confirm both the viability of token sales outside investment contract analysis and the urgent need for proper DAO structuring.
For US based projects seeking to build community-driven, token-based ecosystems while preserving access to institutional capital and equity value capture, the C2C model provides a clear roadmap. It demonstrates that decentralization and regulatory compliance are not mutually exclusive in that by being properly structured, they are mutually reinforcing. By maintaining categorical separation between tokens (as utility, technology based instruments) and equity (as legal investment instruments), while enabling the same individuals to participate in both ecosystems through distinct legal pathways, the C2C model reconciles the innovations of blockchain technology with the substantive requirements of U.S. securities law.
We believe that the framework is immediately implementable under existing US and international law. Projects can adopt the dual-entity structure, draft compliant token whitepapers, establish token locking mechanisms, and prepare Rule 701 and Regulation D documentation today, using existing statutes, regulations, and exemptions. As the regulatory landscape continues to evolve—with Congressional legislation, SEC rulemaking, and judicial precedent providing greater clarity—the C2C model’s foundational principles of categorical separation and documented compliance pathways will remain sound.
Ultimately, the C2C model demonstrates that thoughtful legal engineering can bridge the gap between decentralized innovation and traditional securities regulation, enabling crypto projects to build sustainable, compliant, and economically viable businesses in the United States.
SEC v. Ripple Labs, Inc., No. 20-cv-10832, 2023 WL 4507900, at *5-12 (S.D.N.Y. July 13, 2023) (distinguishing institutional sales from programmatic sales of the same XRP token).
William Hinman, Dir., SEC Div. of Corp. Fin., Digital Asset Transactions: When Howey Met Gary (Plastic), Remarks at the Yahoo Finance All Markets Summit: Crypto (June 14, 2018), https://www.sec.gov/newsroom/speeches-statements/speech-hinman-061418 (discussing “sufficient decentralization” as potential basis for non-security treatment but providing no specific criteria).
Kerr, David and Jennings, Miles, A Legal Framework for Decentralized Autonomous Organizations - Part III: Model Decentralized Unincorporated Nonprofit Association Act (March 5, 2024). Available at SSRN: https://ssrn.com/abstract=4749245 (discussing DAO legal structure challenges and partnership liability risks).
Samuels v. Lido DAO, No. 23-cv-3877, 2024 WL 4711544, at *3-6 (N.D. Cal. Nov. 7, 2024) (holding that Lido DAO constituted a general partnership under California law).
SEC v. PlexCorps, No. 17-cv-7007, 2017 WL 6398722 (E.D.N.Y. Dec. 14, 2017) (granting preliminary injunction against ICO as unregistered securities offering).
Digital Asset Market Clarity Act of 2025, H.R. 3633, 119th Cong. § 101 (2025) (defining “mature blockchain system” as a blockchain that “is not controlled by any person or group of persons under common control” and permitting digital commodity issuers to file notices with the SEC declaring a blockchain system mature or intended to become mature within four years).
Responsible Financial Innovation Act of 2025, S. __, 119th Cong. § 2(5) (discussion draft, 2025) (defining “decentralized governance system” as “any transparent, rules-based system permitting persons to form consensus...in which participation is not limited to, or under the effective control of, any person or group of persons under common control” and explicitly recognizing that such systems may be implemented through “a decentralized unincorporated nonprofit association created pursuant to State law, provided that the legal entity does not operate pursuant to centralized management”).
Lewis Cohen et al., The Ineluctable Modality of Securities Law: Why Fungible Crypto Assets Are Not Securities, SSRN Working Paper No. 4282385 (Nov. 10, 2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4282385 (arguing that fungible tokens lack essential security characteristics and that temporal transformation theory is legally unsound).
Utah Div. of Sec., Green Bay Packers, Inc., No-Action Letter, File No. B01977339 (Oct. 26, 2021).
17 C.F.R. §§ 230.501-508 (2025).
17 C.F.R. § 230.701 (2025).
DEL. CODE ANN. tit. 6, §§ 1901-1916 (2025) (Delaware Uniform Unincorporated Nonprofit Association Act).
WYO. STAT. ANN. §§ 17-22-101 to -112 (2025) (Wyoming Unincorporated Nonprofit Association Act).
DEL. CODE ANN. tit. 6, § 1901(2).
Coin-to-Company Process Description v. 5, at 2 (Dec. 7, 2025) (on file with author) [hereinafter C2C Process Description].
I.R.C. § 1202(a) (2025).
I.R.C. § 1202(b)(1).
One Big Beautiful Bill Act, Pub. L. No. 119-1, § 70431 (2025) (increasing QSBS gain exclusion cap from $10 million to $15 million for stock issued after July 4, 2025, with inflation indexing).
IRC § 957.
United Hous. Found., Inc. v. Forman, 421 U.S. 837, 851-52 (1975) (holding that instruments purchased for consumptive use rather than profit expectation are not securities).
Securities Act of 1933 § 2(a)(1), 15 U.S.C. § 77b(a)(1) (defining “security” to include “any…put, call, straddle, option, or privilege on any security”).
Gwozdzinsky v. Zell-Chilmark Fund, L.P., 979 F. Supp. 263, 266 (S.D.N.Y. 1997) (holding that an instrument is an option only if both quantity and price are determined at the time of transaction).
Lucente v. Int’l Bus. Machs. Corp., 146 F. Supp. 2d 298, 308 (S.D.N.Y. 2001).
17 C.F.R. § 230.506(c)(2)(ii) (requiring issuers to take “reasonable steps to verify” accredited investor status in Rule 506(c) offerings).
17 C.F.R. § 230.506(c).
15 U.S.C. § 77r(b)(4)(D) (providing that Rule 506 offerings are “covered securities” preempting state registration requirements).
17 C.F.R. §§ 230.901-905.
17 C.F.R. §§ 227.100-503.
15 U.S.C. § 77d(a)(6) (authorizing Regulation Crowdfunding with $5 million annual limit).
17 C.F.R. §§ 230.251-263.
15 U.S.C. § 77c(b) (authorizing Regulation A with tiered offering limits).
Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, Pub. L. No. 115-174, § 507, 132 Stat. 1296, 1362 (raising disclosure threshold from $5 million to $10 million).
17 C.F.R. § 230.701(c)(1).
Mindspirit, LLC v. Evalueserve Ltd., 346 F. Supp. 3d 552, 577 (S.D.N.Y. 2018) (holding that equity plan failed to qualify under Rule 701 because the consultant was a corporate entity rather than a natural person).
17 C.F.R. § 230.144 (Rule 144 safe harbor for resales of restricted securities).
I.R.C. § 1202(a) (requiring five-year holding period for 100% gain exclusion on stock issued after September 27, 2010).
SEC v. Glenn W. Turner Enters., Inc., 474 F.2d 476, 482 n.7 (9th Cir. 1973) (discussing horizontal commonality requiring pooling of assets and pro-rata distributions).
SEC v. ETS Payphones, Inc., 408 F.3d 727, 732 (11th Cir. 2005) (adopting broad vertical commonality test requiring only that “the investors’ fortunes are interwoven with and dependent upon the efforts and success of those seeking the investment or of third parties”).
17 C.F.R. §§ 230.501-508 (Regulation D).
31 C.F.R. § 1022.380 (FinCEN regulations for money services businesses).
17 C.F.R. § 230.506(c)(2)(ii).
I.R.C. § 7701(a)(2) (defining partnership to include unincorporated organizations engaged in business).
I.R.C. § 1202(c)(2) (requiring stock to be issued while corporation qualifies as C corporation, not S corporation or partnership). Credit to Jason Schwartz at Cahill on this point.
Infrastructure Investment and Jobs Act § 80604 (increasing QSBS cap to $15 million for stock issued after July 4, 2025).
I.R.C. § 1202(b)(1) (providing alternative cap of 10 times adjusted basis).
I.R.C. § 1202(a)(4) (providing 100% exclusion for stock held more than five years).
IRS Notice 2014-21, 2014-16 I.R.B. 938 (treating virtual currency as property for federal tax purposes).
I.R.C. § 1012 (establishing cost basis for purchased property).
Responsible Financial Innovation Act of 2025, S. __ (discussion draft, 119th Cong., 1st Sess.) [hereinafter RFIA].
S. Comm. on Banking, Hous. & Urban Affairs, Responsible Financial Innovation Act of 2025, Discussion Draft, 119th Cong. (Sept. 5, 2025).
SEC v. Ripple Labs, Inc., No. 20-cv-10832, 2023 WL 4507900 (S.D.N.Y. July 13, 2023).
Paul S. Atkins, Chairman, SEC, Remarks at the Federal Reserve Bank of Philadelphia: Project Crypto and the Next Phase of Digital Asset Oversight (Nov. 12, 2025), https://www.sec.gov [hereinafter Atkins Remarks].
Sec. & Exch. Comm’n v. Terraform Labs Pte. Ltd., No. 23-CV-1346 (JSR), 2023 WL 4858299 (S.D.N.Y. July 31, 2023) (which took a contrasting view and created a split within SDNY).
DEL. CODE ANN. tit. 6, § 1904(a) (“A member or agent of an unincorporated nonprofit association is not liable for a debt, obligation or liability of the association solely by reason of being a member or acting as an agent of the association.”).
