a16z: Five Principles to Avoid the "Pitfalls" of Token Launches
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a16z: Five Principles to Avoid the "Pitfalls" of Token Launches
Avoid public fundraising in the United States and carefully consider secondary markets.
Navigating Web3 tides with focused insightsAuthor: Miles Jennings, General Counsel and Head of Decentralization at a16z crypto
Translation: Karen, Foresight News
Editor's Note: "How should I launch a token?" is one of the most common questions we receive from founders. Given the rapid evolution of the crypto industry—and rising prices fueling FOMO—many ask: everyone else is launching tokens; should I too? For builders, however, approaching token launches with caution is essential. In this article, we explore pre-launch preparations, risk management strategies, and an operational readiness framework.
To outside observers, the tension between blockchain builders and the U.S. Securities and Exchange Commission (SEC) may seem overblown. The SEC argues that nearly every token should be registered under U.S. securities laws, while builders find this notion absurd. Despite this disagreement, both the SEC and builders share a fundamental goal: creating a level playing field.
This tension exists because both sides operate from entirely different perspectives. Securities laws create a level playing field by imposing disclosure requirements designed to eliminate information asymmetry—applicable to companies issuing securities publicly. Blockchain systems, on the other hand, aim to create a level playing field for a broader set of participants (developers, investors, users, etc.) through decentralization, using transparent ledgers, eliminating centralized control, and reducing reliance on managerial efforts. While builders target wider audiences, they also aim to eliminate information asymmetry regarding the system and its native asset—the token.
It’s unsurprising that regulators are skeptical of the latter approach. Decentralization has no precedent in traditional enterprise structures—it leaves regulators without a clear party to hold accountable—and because decentralization is difficult to establish and measure, it can easily be faked.
For better or worse, it is the responsibility of Web3 builders to demonstrate that the blockchain industry’s approach is viable. From the SEC’s April 2019 framework for digital assets to its recent enforcement actions against Coinbase, it’s clear that Web3 projects must operate within the guidance provided by the SEC.
After determining when and how to launch a token, projects can follow these five rules:
Note: These rules are not intended as ways to circumvent U.S. securities laws. All guidelines depend heavily on the specific facts and circumstances of each project. Always consult legal counsel before executing any plan.
Rule 1: Never Conduct a Public Token Sale in the U.S. for Fundraising Purposes
In 2017, initial coin offerings (ICOs) flourished, with dozens of projects promising major technological breakthroughs and seeking capital. While some projects delivered on their promises—including Ethereum—far more failed to do so.
At the time, the SEC responded forcefully and reasonably. It sought to apply securities laws to ICOs, which often met all criteria of the Howey Test—a contract, scheme, or transaction involving an investment of money in a common enterprise with a reasonable expectation of profit based on the entrepreneurial or managerial efforts of others.
When it comes to primary transactions (i.e., token issuers selling tokens to investors), the application of the Howey Test is clearer than in almost any other context. In many ICOs, token issuers explicitly represented and promised that proceeds from token sales would fund operations and provide potential returns to investors. Regardless of whether the instrument sold is a digital asset or stock, such circumstances constitute securities transactions.
Since 2017, the industry has largely abandoned fundraising via public token sales in the U.S. We’ve entered a new era. ICOs, as they once existed, are gone. Instead, tokens now enable holders to govern networks, participate in games, or build communities.
Applying the Howey Test to tokens today is far more difficult—airdrops involve no monetary investment, decentralized projects don’t rely on managerial efforts, and many secondary token trades clearly fail to meet Howey criteria. Without public marketing, secondary buyers may not rely on others’ efforts for profit.
Despite significant progress over the past seven years, ICOs reappear in new forms during every market cycle. Some project teams appear to disregard U.S. securities laws for several reasons:
1. Some industry participants believe U.S. securities laws are invalid or unfair, making violations justifiable—and conveniently ideological for anyone profiting from them. 2. Others design novel schemes believing minor factual changes lead to different outcomes—e.g., “protocol-owned liquidity” (indirect token sales via DAOs, with proceeds controlled through decentralized governance) and “liquidity bootstrapping pools” (indirect token sales via liquidity pools on decentralized exchanges). 3. Some seek to exploit uncertainty created by the SEC’s enforcement-first regulatory approach, which has produced inconsistent and irreconcilable rulings (see: Telegram, Ripple, Terraform Labs, and Coinbase).
Projects must carefully avoid these approaches. None justify ignoring or violating U.S. securities laws. The only legitimate path forward is mitigating the risks these laws were designed to address. Publicly selling tokens to Americans for fundraising runs counter to this goal—and remains one of the top regulatory concerns in crypto.
The good news is that fundraising remains possible through other means. Public equity and token offerings outside the U.S., as well as private placements of equity or tokens, can be conducted compliantly without triggering registration requirements under securities law.
Summary: Public sales in the U.S. are self-defeating mistakes—avoid them at all costs.
Rule 2: Pursue Decentralization
Builders can adopt various token distribution strategies. They might decentralize before launch, launch outside the U.S., or restrict token transferability to block U.S. secondary markets.
I discuss these options in detail in this article, using the DXR (Decentralize, X-clude, Restrict) token launch framework, which outlines how each strategy reduces legal risk.
If a project hasn’t achieved sufficient decentralization at launch, X-clude and Restrict strategies can help comply with U.S. securities laws. But make no mistake: neither substitutes for true decentralization. Decentralization is the only path that meaningfully reduces the risks securities laws aim to prevent.
Therefore, regardless of initial strategy, any project planning to use tokens to convey broad rights (economic, governance, etc.) must treat decentralization as its “North Star.” Other strategies are merely temporary workarounds.
How does this work in practice? No matter how a project evolves, it should consistently advance toward greater decentralization. Examples include:
1. A Layer 1 blockchain’s founding team may focus development efforts post-mainnet launch on achieving key technical milestones. To reduce “reliance on management” risk, they could initially exclude the U.S., then introduce tokens there only after meaningful decentralization progress. Milestones might include permissionless validator sets or smart contract deployments, increasing independent builders on the network, or reducing concentration of token holdings.
2. A Web3 gaming project might use restricted tokens in the U.S. to incentivize in-game economic activity. As user-generated content grows, gameplay relies more on independent third parties, or more independent servers go live, the project could gradually lift token restrictions.
Planning every step of a decentralization roadmap is arguably the most critical pre-launch task. The chosen strategy will profoundly impact how the project operates and communicates at launch and beyond.
Summary: Decentralization matters—pursue it relentlessly in every phase.
Rule 3: Communication Is Critical
Let me emphasize: even seemingly minor communications can play pivotal roles in a project. One misstatement by a CEO could jeopardize the entire endeavor.
Projects must implement strict communication policies tailored to the nuances of their token launch strategy. Let’s break this down using the strategies from the token launch framework:
Decentralization
The goal here is ensuring token purchasers do not have a “reasonable expectation of profits derived from the entrepreneurial or managerial efforts of others,” as defined by the Howey Test.
In a truly decentralized project, token holders don’t expect a management team to generate profits—because no single team or individual holds such power. Founders must not imply otherwise, or securities laws may apply.
What constitutes a “reasonable expectation”? It depends largely on how the project or token issuer discusses the token—including tweets, messages, and emails. Courts have repeatedly ruled that when projects highlight core teams driving progress and economic value, investors reasonably rely on those teams’ efforts for returns. This finding can trigger securities regulation.
Regarding decentralization, strict communication policies aren’t cheap loopholes to evade U.S. securities laws—they’re legitimate tools to reduce the likelihood that token buyers rely on managerial or entrepreneurial efforts for profit, thereby protecting Web3 projects and users.
So what does this look like in practice?
First, projects should avoid discussing or mentioning their token before launch—including potential airdrops, token distributions, or tokenomics. The consequences can be severe—the SEC has successfully blocked token launches before and may do so again. Don’t give them the opportunity.
Second, after launch, projects should avoid discussing token price or potential value, or framing the token as an investment opportunity. This includes referencing mechanisms that could increase token value or committing to continued funding via private capital for development and success. All such actions increase the perception that token holders have a reasonable expectation of profit.
After decentralization, how ecosystem participants (including founders, dev companies, foundations, and DAOs) describe their roles becomes crucial. Founders often slip into centralized language—even in highly decentralized projects—especially when accustomed to speaking in first person about achievements, milestones, and initial rollouts.
Ways to avoid this trap:
1. Avoid inaccurate suggestions of ownership or control over the protocol or DAO (e.g., “As CEO of the protocol…”, “Today we launched feature X…”).
2. Minimize forward-looking statements, especially regarding mechanisms like programmed token burns aimed at price targets or stability.
3. Avoid commitments or guarantees of ongoing effort, and refrain from describing such efforts as disproportionately important to the ecosystem (e.g., use “initial development team” instead of “core” or “lead” developers; avoid calling individuals “managers”).
4. Highlight efforts that have promoted or will promote greater decentralization, such as contributions from third-party developers or app operators.
5. To avoid confusion with the DevCo or founder behind the project, give the project’s DAO and foundation a distinct voice. Ideally, avoid ambiguity by renaming or rebranding the original DevCo so it doesn’t share the protocol’s name.
Above all, all communications must reflect the principles of decentralization, especially in public forums. Communications should be open and designed to prevent any individual or group from holding significant asymmetric information.
For more on the practical implications of decentralization, see here and here.
Summary: Once decentralized, no individual or company speaks for the project. The ecosystem is an independent, living entity. One misstep can lead to catastrophic consequences.
X-clude
When launching outside the U.S., projects can draw inspiration from traditional finance and adopt strict communication policies aligned with Regulation S. This rule exempts certain offshore offerings from U.S. securities registration requirements.
The goal is preventing tokens from flowing back into the U.S., so communications must avoid “targeted selling efforts” promoting the token domestically. The strictness of these policies ultimately depends on whether there’s “substantial U.S. market interest” (SUSMI)—i.e., significant demand from U.S. investors.
Summary: If you’re not offering tokens in the U.S., don’t communicate as if you are. Any public statement about your token must clearly state it’s unavailable to U.S. persons.
Restrict
Limiting tokens to restricted transfers or off-chain points allows for more flexible communication policies. Thoughtful projects face less legal risk because, under the Howey Test, individuals cannot make a “capital investment” to obtain the token.
However, if a project encourages participants to view restricted tokens or points as investment products, such statements could severely undermine the legal basis of the restriction.
Summary: Restrictions don’t shield builders from liability. Misleading statements can haunt a project for years, blocking changes in launch strategy or even preventing future decentralization.
Rule 4: Be Cautious About Secondary Market Listings and Liquidity
Projects often want their tokens listed on secondary trading platforms so more people can access and use them—for example, needing ETH to interact with the Ethereum blockchain. This usually requires ensuring sufficient liquidity on exchanges; insufficient liquidity can cause price volatility and increase risks for both the project and users. Why?
In the early days after a token launch, large buys or sells on a given platform can dramatically move the token’s price. When prices drop, everyone loses. When prices rise, FOMO-driven investors may inflate prices further, exposing themselves to greater risk when the market stabilizes.
Improving accessibility and ensuring adequate liquidity (often via market makers) benefits Web3 users and helps create fairer, more orderly, and efficient markets.
Despite this being a stated SEC mission, it has used project announcements about token availability on secondary exchanges as grounds for lawsuits. It also treats providing liquidity in secondary markets similarly to direct token sales.
Projects that didn’t initially pursue decentralized launch strategies have greater flexibility around secondary listings and liquidity, as both alternative strategies delay full transferable token availability in the U.S.
Summary: Projects must exercise extreme caution when addressing listings and liquidity. Risks often outweigh rewards. At minimum, projects uncertain about achieving “sufficient decentralization” should avoid posting about exchange listings—and likely should not engage in any market-making activities in the U.S.
Rule 5: Lock Tokens for at Least One Year Post-TGE
This point is critical. Projects must impose transfer restrictions on all tokens issued to insiders (employees, investors, advisors, partners, etc.), affiliates, and anyone involved in token distribution. These tokens should be locked for at least one year from the token generation event (TGE).
The SEC has successfully used the absence of a one-year lock-up to block token launches. It may try again. Worse, this precedent enables plaintiff lawyers to file class-action suits—free money for them, endless pain for projects.
Ideally, tokens should remain locked (or subject to other appropriate transfer restrictions) for at least one year, followed by linear vesting over the next three years—resulting in a total four-year lock-up period.
This approach helps mitigate legal risks while also reducing downward price pressure and signaling long-term confidence—beneficial for sustained project success. It’s a win-win.
Projects should also be wary of investors demanding shorter lock-up periods. Such requests may signal disregard for securities laws and intentions to dump tokens immediately.
For projects issuing tokens outside the U.S., any tokens distributed to U.S.-based employees, investors, or insiders should follow this rule. Teams should consult legal counsel on whether broader lock-ups are needed to maintain eligibility under Regulation S exemptions.
Summary: Enforce transfer restrictions for at least one year post-TGE. Extending release schedules over the following two to three years benefits insiders, users, and the project’s future. Anyone arguing otherwise likely has questionable motives.
As emphasized throughout this article, every token launch is unique. However, certain principles apply broadly: avoid public fundraising, plan for decentralization, enforce strict communication policies, proceed cautiously with secondary markets, and lock tokens for at least one year. Following these guidelines helps avoid the most common pitfalls in token launches. More importantly, adhering to these best practices strengthens legitimacy, enables safe innovation, and advances the entire industry.
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