Like new cryptocurrencies, ICOs are undergoing the growing pains of early adoption, including a host of security, perception and compliance issues.

As the latest fundraising phenomenon, ICOs (initial coin offerings, or token sales), provide a much-needed answer to cash-strapped startups overcoming myriad challenges to raising money and staying financially solvent.

The reason? For one, financial regulation around ICOs is murky at best. There is confusion and disagreement around what it means to conducting legal and compliant token sales, including if issuers should adhere to know-your-customer and anti-money-laundering, or AML, regulations. KYC is the method in which issuers verify the identity of their investors. Even after the SEC discussed this issue with its Release No. 81207 in July 25, 2017, whether a token is also actually a security still remains unclear.

The government is still not clear if ICO issuers should follow "know your customer" anti-money laundering rules, according to Jumio's Harrison. IMAGE: Adobe Stock

The SEC declined to provide a bright-line test, instead emphasizing that each sale must be considered on an individual basis. That said, the SEC is not the only governing agency enforcing securities regulations. Plaintiffs' attorneys, state attorneys-general and state securities commissioners will all be watching these sales with interest.

Meanwhile, those same nebulous regulations around ICOs also make them a potential haven for fraudsters, and others who either don’t want to register their offering or provide adequate safeguards to the public. This could spell trouble for backers who have a financial stake in the process, because if an ICO is neither regulated or registered, investors wouldn’t be able to recoup their losses if something goes wrong.

While many of the security issues are still being ironed out, organizations considering leveraging ICOs as a fundraising tool need to be equally intent on complying with KYC and AML regulations, ensuring that they’re thorough in their legal structuring, documentation and due diligence. Simply put, voluntary compliance in a token sale will give the project a stamp of legitimacy. Consequently, many would-be regulators have expressed that they’re open to token sales as long as KYC laws are obeyed.

In addition to legitimacy, pursuing compliance with KYC/AML will provide ICO issuers improved public perception that can help organizations garner credibility with customers later on. What’s more, voluntary KYC/AML compliance can also help ICO issuers reach a larger audience and expand the number of jurisdictions that they can market to. By voluntarily complying with KYC and AML directives, businesses have the opportunity to engage with global investors and financial institutions as the company scales.

And until the murky regulatory waters become a little clearer, organizations must stay ahead of the compliance curve to avoid potential fines, audits and scrutiny. That means organizations need to be as transparent as possible, especially when dealing with potential regulators. At the end of the day, making a demonstrable effort toward due diligence will go a long way in dealing with the anticipated headaches of working with investors, financial institutions and regulators that will inevitably come down the road.