A Review In Terms Of Legal: Initial Coin Offering
Definition Of 'Initial Coin Offering (ICO)'
ICO is the abbreviation of Initial Coin Offering. It means that someone offers investors some units of a new cryptocurrency or crypto-token in exchange against cryptocurrencies like Bitcoin or Ethereum.
For traditional companies, there are a few ways of going about raising funds necessary for development and expansion. A company can start small and grow as its profits allow, remaining beholden only to company owners but having to wait for funds to build up. Alternately, companies can look to outside investors for early support, providing them a quick influx of cash but typically coming with the trade-off of giving away a portion of ownership stake. Another method sees companies go public, earning funds from individual investors by selling shares through an Initial Public Offering (IPO).
With the success of Ethereum ICO are more and more used to fund the development of a crypto project by releasing token which is somehow integrated into the project. With this turn, ICO has become a tool that could revolutionize not just currency but the whole financial system. ICO token could become the securities and shares of tomorrow.
Short History Of ICO
Maybe the first cryptocurrency distributed by an ICO was Ripple. In early 2013 Ripple Labs started to develop the Ripple called payment system and created around 100 billion XRP token. The company sold these token to fund the development of the Ripple platform.
Later in 2013, Mastercoin promised to create a layer on top of Bitcoin to execute smart contracts and tokenize Bitcoin transactions. The developer sold some million Mastercoin token against Bitcoin and received around $1mio.
Several other cryptocurrencies have been funded with ICO, for example, Lisk, which sold its coins for around $5mio in early 2016. Most prominent however is Ethereum. In mid-2014 the Ethereum Foundation sold ETH against 0.0005 Bitcoin each. With this, they receive nearly $20mio, which has become one of the largest crowdfunding ever and serves as the capital base for the development of Ethereum. As Ethereum itself unleashed the power of smart contracts, it opened the door for a new generation of Initial Coin Offering.
The legal state of ICO is mostly undefined. Ideally, the token is sold not as a financial asset but as a digital good like many other things. This is why ICO is often called “crowd sale”. In this case, in the most jurisdiction, the funding with an ICO is not regulated, which makes it extremely easy and paperless, given a lawyer experienced with the issue is on board.
However, some jurisdictions seem to be aware of ICO and tend to regulate them similar to the sale of shares and securities. The spectacular implosion of the DAO did a good job in kindle regulators attention. So while ICO currently mostly happen in a gray area, in the future they most likely will be regulated. This could bear some financial and legal risks for investors. Also, the cost and effort to comply with regulation could reduce the advantages of ICO compared with traditional means of funding.
In addition, the risks posed by ICOs against investors concern the regulatory and supervisory authorities in the financial markets. The Securities and Exchange Commission of the United States(SEC), in a report prepared for investors in July 2017, emphasizes that ICOs can offer fair and lawful investment opportunities as well as fooling investors with high profit promises. In the report, the SEC firstly points out that each ICO activity needs to be evaluated in its own way, and under certain circumstances, the coins offered by the ICO can be considered as securities. The first thing that investors should pay attention to here is to make sure that the ICO is registered with the SEC in the securities assisted situation, or that they are exempted from registration. The SEC reminds investors that investors should be aware of what the money will be used for and; informed of the tokens provided with the ICO will provide what he or she will earn. In the continuation of the report; The ICO advises the provider to have a trusting, understandable and clear plan. Here the rights that the investor has with coins in white paper should be arranged as clearly as possible. If the coins or tokens offered by ICOs are securities, these are already mandatory by federal law enforcement by licensed companies. It is recommended that the history of the relevant ICO provider be reviewed by investors. Reminding that fraudsters are closely following technological developments, the SEC invites investors to be suspicious where promises are high. In addition, the threats and dangers of the digital world, such as bad software and hacker activities, are always mentioned in the report as threats that investors should take into consideration.
Besides all these, in Turkey, currently in relation to ICOs, there is no disclosure from financial markets regulatory and supervisory authorities for example, from the Capital Markets Board(CMB). But in the near future, ICO’s status, with the impact on financial markets and detection of position in Turkey, The CMB is also expected to make a public statement on its approach to ICOs.