Is an Investment Gray Area a Fallacy?

Considerations for both entrepreneurs and investors

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The often cited excuse uttered by the soon to be convicted white collar criminal is, ‘I didn’t do anything wrong, I was operating in the gray area for god’s sake!’. Operating in the gray area probably kept the miscreant entrepreneur out of jail for longer than he deserved. For in reality the gray area is not usually a gray area at all, it is just a space that no one, including regulators and law enforcement, have paid much attention to, yet. But they always do, in the end.

This article explores whether the gray area really exists, whether entrepreneurs should consider operating in the gray area, strategies that can be followed and finally as an investor, how to protect the downside when investing in the so-called gray area.

So what is the gray area?

Indeterminate territory, undefined position, neither here nor there. For example, There’s a large gray area between what is legal and what is not. This term, which uses grayin the sense of “neither black nor white” (or halfway between the two), dates only from the mid-1900s. Source:

Let’s look at a recent example of this gray area. A space close to our hearts. From its creation to the current day everyone from the founders of cryptocurrency projects to financial regulators, and especially financial journalists, have at some point described cryptocurrency as operating in the gray area. What they mean by that is there are no precise laws that cryptocurrency can be conveniently slotted into.

Back in 2017 When the ICO (initial coin offerings) craze was going gangbusters investors poured billions of dollars into many questionable projects on the back of what many had described as a new form of financing. Most of these ICOs had not engaged a lawyer for advice let alone received sign off from their country’s financial regulator. It was a free-for-all. Do it yourself funding at the extreme. It continues to this day.


A few notable ICO examples include:


Telegram — two brothers who founded the widely used encrypted messaging app — raised $1.7 billion in two private offerings to institutional and private investors in 2018. In return, the developers promised that investors would receive 2.9 billion “Grams”. The developers spent $400 million to develop the new open-source blockchain, which they said would be faster and more efficient than the Bitcoin and Ethereum platforms.

The SEC sued to shut it down. The commission argued that under the definition laid out in the U.S. Supreme Court’s 1946 ruling in SEC v. Howey, Grams were securities that could not be traded without registration at the SEC.


Binance Coin — originally based on the Ethereum blockchain has subsequently become the Binance chain’s native token. It was launched in July 2017 as part of an initial coin offering with a cap of 200 million BNB tokens.

Through the ICO process, it provided 10%, or 20 million BNB tokens, to angel investors, 40%, or 80 million, to the founding team, and the remaining 50%, or 100 million, to the various participants.

Almost half of the funds raised during the ICO were intended for Binance branding and marketing, with the remaining one-third going toward building the Binance platform and making essential updates to the Binance ecosystem.


Ethereum — lots of crypto enthusiasts were excited about Ethereum and its programmable blockchain when its July 2014 ICO took place. It ended up raising $18.4 million and became the second-largest cryptocurrency.


Cardano — improved on aspects of Ethereum and had an even more successful ICO. In January 2017, it raised $62.2 million. It would eventually break into the top five cryptocurrencies by market capitalization.


XRP — Ripple, the organization behind XRP, raised $1.3 billion through an ICO. The SEC maintains this was the sale of securities an allegation Ripple is defending vigorously.

What is an ICO?

An initial coin offering is an event where a company sells a new cryptocurrency to raise money. Investors receive cryptocurrency in exchange for their financial contributions.

In many ways, an ICO is the cryptocurrency version of an initial public offering (IPO) in the stock market. While it’s possible to make sizable profits through ICOs, a lack of regulation makes them extremely risky.

Cryptocurrency and the gray area

When the first tranche of ICOs started to raise money it was claimed that these were a new breed of funding which differed from an IPO because it was a sale of tokens rather than stock. Project founders stated that tokens functioned like a currency, you could buy stuff with them they explained. They further claimed, and still do, that there are no specific laws that cover this type of fund raising and until there are they are free to make hay whilst the sun shines.

Whilst the entrepreneur is always searching for new opportunities and testing boundaries and laws the regulator likes to fit pegs into holes. If the peg won’t fit immediately they will find a way. For example once the dust had settled and the US’s SEC had worked out what the hell an ICO actually was they quickly established that all this talk of a gray area was garbage. If projects like Telegram and XRP were raising money to help build their platforms then tokens had the same purpose as a security. For people were buying tokens for profit, not to spend on a coffee.

It wasn’t long before the regulator started taking enforcement action with many projects having to return funds to investors in addition to paying a hefty penalty. Many projects however fell through the cracks with some high profile ones such as Cardano, Ethereum and Binance saving millions in legal fees whilst successfully protecting their equity in their holding companies.

Any good lawyer would have happily told a wannabe crypto entrepreneur that raining money through an ICO was in fact not a gray area and represented a clear sale of securities. However most entrepreneurs, if you can call them that, didn’t even bother consulting a lawyer, with the mentalitlty that if everyone else is doing it, fuck it, so can I.

In reality there was never a gray area in the world of cryptocurrency. If you are raising money the existing laws are more than adequate to catch most if not all types of investment opportunity. What makes it an acceptable risk for the entrepreneur is the fact that ‘everyone else is doing it’. Maybe with so many participants they will not be noticed, they reason.

The trick is not to get yourself noticed as the likes of Telegram and XRP did. Don’t upset the regulator. Keep a low profile. Quit whilst you’re ahead. And if that strategy fails try to reach an amicable settlement, amicable being the operative word. Maybe the crypto project founder can close down and even keep the money, putting it down to experience and go again but compliantly next time. The key is not to lose your livelihood and reputation over it. That will hang like a millstone from your ankle for the rest of your corporate life, sending you down paths you would never have even contemplated when you started out on the entrepreneurial journey.

Another gray area in crypto

The SEC is determined to get crypto exchanges under its remit, something the exchanges are resisting. The SEC claims that exchanges are selling securities. Another potential gray area? you may well think. Possibly. But let’s be real, every one of the cryptocurrencies on a crypto exchange is being bought and sold as an investment for profit. A definition which is covered by existing legislation in most jurisdictions as constituting a security. So whilst this may seem like a gray area it is actually black and white. In time all cryptocurrency exchanges will have to register with their local financial regulator.

A few other example of gray areas

There was the case of carbon credits where promoters argued they were selling a commodity rather than a security reasoning that securities laws didn’t apply to them.

There was the sale of land plots and partnerships in oil wells. These investments, like the carbon credit and cryptocurrency after them, avoided regulation duping billions of dollars from investors, maintaining these investments operated in a gray area. Whether they were or not was not going to save them. Regulators found a way to come after these schemes. Whether it was by focusing on their misleading advertising, or by proving through complex legal arguments that these schemes were in fact the sale of securities in disguise. Most were shut down. Although many fell through the cracks and the miscreant promoters ran off into the sun set.

Investor considerations

That brings us nicely onto what an investor should do if an investment he or she is considering is in the gray area. The first thing to remember is that anything in the gray area is unproven and hence high risk. That means under no circumstances should investors be investing long term savings into these types of investments. When a promoter claims their new investment is low risk, that is a clear sign that the investment opportunity is probably a scam and should be avoided. When the founder of the stable coin TerraUSD (UST) was running around saying the coin was a low risk way of storing funds and earning returns of close to 20% alarm bells should have been sounding. The rule is; if it is unproven it is high risk, there are no ifs and buts.

Final words on the gray area

Let’s revisit that entrepreneur who we met briefly in the opening paragraph. If he is lucky he won’t be on a bus heading to the Federal lockup, he will simply have to return investor’s money and pay a hefty fine which will probably wipe him or her out financially. The entrepreneur considering embarking on a new venture in this so-called gray area has to ask himself, is it worth it? If the answer is yes and this entrepreneur has balls the size of basketballs then a wise next move is to seek legal advice. Follow the tried and tested path.

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No Financial Advice

This report does not constitute financial advice or a recommendation to buy in any way. Always do your own research and never invest more than you can afford to lose. Investing in cryptocurrencies is a high risk, and you could lose 100% of your investment.