An organization working on a blockchain-based project can issue valuable tokens acceptable to a community. Tokens are cryptocurrencies that represent an asset or specific use and reside on a respective blockchain. They can be used for investment purposes, making purchases, or as a store of value. For example, ERC-20 tokens reside on the Ethereum blockchain.
A Token Generation Event (TGE), sometimes referred to as token launch, is an approach used by businesses and projects to crowdsource funds by generating and offering tokens in a blockchain-based network. Token Generation Events are commonly used as an instrument to obtain publicity and engagement in crypto/blockchain communities with the goal of fundraising.
Reason for TGEs Adoption
Initial coin offerings (ICOs), similar to TGEs, was the method used by businesses/organizations to fund their projects. In December 2017, the SEC classified tokens from ICOs as securities in a public statement issued by the SEC Chair, Jay Clayton stating that
“…a token constitutes an investment contract and therefore is a security under our federal securities laws. Specifically, we concluded that a token offering represents an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.”
Besides this statement clearly subjecting ICOs to high regulatory standards, this further meant that its proceeds are taxable under the US securities law.
Many businesses and start-ups in the crypto community now prefer to brand their fundraising events as TGEs ensuring their token is not labelled as a security to avoid heavy regulatory scrutiny and associated taxes.