Almost all ICOs are illegal.

Firstly I would like to address the problem here, initial coin offerings are currently unclassified. There are no legal precedents that explicitly pertain to cryptocurrency crowd-sales. However, according to Chris at decentralized digital, there is a strong case to be made that cryptocurrency crowd-sales can be classified as securities. Securities as in the SEC.

The SEC defines securities as
"any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a ‘‘security’’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.”,

Well, that doesn't really give us too much information. That, my friends, is intentional. The law is intended to give regulators lots of leeway how exacatly to implement the law. Furthermore, in the case SEC v. W.J. Howey Co, the SEC essentially determined that in the instances where the instrument is novel, the SEC will interpret the implications of the asset. In other words. They will look at the ends, not the means. To elaborate further, SCOTUS defines investment contracts as something that meets the following requirements.

The investment of money (or anything of value);
In a common enterprise (Some courts require vertical³ and horizontal commonality⁴);
Where investors are led to expect profit$;
Solely (which later was held to mean predominantly⁵) from the efforts of others.

So let's look at a case study of just about every ICO:

Investment of money

Yes, almost every ICO involves an investment of money. If money isn't coming in the ICO won't be successful and there will be no point in holding it. Almost any cryptocurrency that has value and in fungible meets this requirement for being an investment contract.

Common Enterprise

From what I gather this means to ask if there is a common goal being worked towards by the investors. Some cryptocurrencies don't actually fall under this category. For example, if Dogecoin had an ICO they may not have met this requirement because they don't share a common goal and there is no active governing entity. The most likely candidate for common enterprise in Dogecoin would simply be "To the moon!"

That being said, many many other ICOs do indeed fall under this category. If Steemit did an ICO with Steem, they would have met this condition. Stakeholders of Steem vote on the issues to be addressed and vote on witnesses to carry out executive decisions. They also put trust in Steemit Inc to continue to develop the platform. All that spells out common enterprise.

Profit

Most ICOs intend to make their investors profitable. Most people who buy ICO tokens intend to cash out eventually and many ICOs tought the inherent value in the token that will soon be realized.

Do token holder rely on the effort of others to make a profit

Yes, many ICOs as previously mentioned name a governing entity that the revenue from the sale will be directed to. Often times the governing body is also in charge of establishing a value proposition and increasing the value of the token in turn.

Conclusions

I am not a lawyer, and none of the information above should be taken as legal advice. That being said, it's quite clear to me that the way most initial coin offerings are implemented in the US is illegal. It remains to be seen how one might carry out a fully legal and ethical coin offering in the United States.

Footnotes

Much of this article is adapted from this excellent piece by Chris at decentralizedlegal.com.
https://decentralizedlegal.com/securities/

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