Jump to content

Initial coin offering

From Wikipedia, the free encyclopedia

This is an old revision of this page, as edited by Swfindlay101 (talk | contribs) at 14:20, 3 January 2018 (→‎Regulation). The present address (URL) is a permanent link to this revision, which may differ significantly from the current revision.

An initial coin offering (ICO) is a means of crowdfunding centered around cryptocurrency,[1][2] which can be a source of capital for startup companies.[3] In an ICO, some quantity of the crowdfunded cryptocurrency is preallocated to investors in the form of "tokens," in exchange for legal tender or other cryptocurrencies such as Bitcoin or Ethereum. These tokens become functional units of currency if or when the ICO's funding goal is met and the project launches.

ICOs provide a means by which start-up companies can avoid burdensome costs of regulatory compliance and intermediary financial organizations, while increasing risk for investors.[4] ICOs may fall outside existing regulations or may need to be regulated[5][6] depending on the nature of the project, or banned altogether in some jurisdictions, such as China and South Korea.[7][8]

History

The first token sale (also known as an ICO) was held by Mastercoin in July 2013. Ethereum raised money with a token sale in 2014,[9] raising 3,700 BTC in its first 12 hours, equal to approximately $2.3 million dollars at the time.[10] An ICO was held by Karmacoin in April 2014 for its Karmashares project.[11]

ICOs and token sales became popular in 2017. There were at least 18 websites tracking ICOs before mid-year.[12] In May, the ICO for a new web browser called Brave generated about $35 million in under 30 seconds.[13] Messaging app developer Kik's September 2017 ICO raised nearly $100 million.[14] At the start of October 2017, ICO coin sales worth $2.3 billion had been conducted during the year, more than ten times as much as in all of 2016.[15][16][17][18] As of November 2017, there were around 50 offerings a month,[19] with the highest-grossing ICO as of January 2018, being Filecoin raising $257 Million (and $200 Million of that being raised within the first hour of their token sale),[20].

Kik had previously issued $50 million in tokens called "Kin" to institutional investors, and sought to raise an additional $125 million from the public. In connection with this ICO, an unidentified third party executed a phishing scam by circulating a fake URL for the offering through social media.[21]

By the end of 2017, ICOs had raised almost 40 times as much capital as ICOs had raised in 2016, although still amounting to less than two percent of the capital raised by IPOs.[4]

Detail

The term may be analogous with 'token sale' or crowdsale, which refers to a method of selling participation in an economy, giving investors access to the features of a particular project starting at a later date. ICOs may sell a right of ownership or royalties to a project, in contrast to an initial public offering which sells a share in the ownership of the company itself. According to Amy Wan, a partner at Trowbridge Sidoti LLP practicing crowdfunding and syndication law, "The coin in an ICO is a symbol of ownership interest in an enterprise—a digital stock certificate, if you will."[22] In contrast to initial public offerings (IPOs), where investors gain shares in the ownership of the company, in ICOs, the investors buy coins of the company, which can appreciate in value if the business is successful.[23][24] These coins are sometimes "pre-mined", eliminating the need for proof of work. Often contributions are capped at a certain value and depending on how long the ICO lasts, on a per-day basis. Conversely, those same coins can depreciate if the company does not perform.

At least 400 ICOs have been conducted as of August 2017.[25] Ethereum is (as of August 2017) the leading blockchain platform for ICOs with more than 50% market share.[26] These tokens are called ERC20. The Ethereum network ICOs have resulted in considerable phishing, Ponzi schemes, and other scams, accounting for about 10% of ICOs.[27][28] Older coins focused on being a currency, while newer coins based on the Ethereum blockchain have developed some controversy through the selling of what is tantamount to "securities" in the form of ICO tokens. These developments have created an evolution in the ICO release marketplace towards the new "utility" token replacing the typical token. Some commentators believe that "utility tokens", which can be exchanged for a unit of service such as storage, could avoid such questions.[29]

Criticisms

As a mechanism for scams

ICOs can be used for a wide range of activities, ranging from corporate finance, to charitable fundraising, to outright fraud.[30] The US Securities and Exchange Commission (SEC) has warned investors to beware of scammers using ICOs to execute "pump and dump" schemes, in which the scammer talks up the value of an ICO in order to generate interest and drive up the value of the coins, and then quickly "dumps" the coins for a profit. The developers themselves can be guilty of such tactics.

However, the SEC has also acknowledged that ICOs “may provide fair and lawful investment opportunities.”[31] The UK Financial Conduct Authority has also warned that ICOs are very high risk and speculative investments, are scams in some cases, and often offer no protections for investors. Even in cases of legitimate ICOs, funded projects are typically in an early and therefore high-risk stage of development.[32] The European Securities and Markets Authority (ESMA) notes high risks associated with ICOs and the risk that investors may lose all of their cash.[33] Increased regulation of ICOs will reportedly encourage institutional investors to invest in them.[34]

As a bubble

Main article: Cryptocurrency bubble

Wired noted in 2017 that the bubble was about to burst.[35] Some investors have flooded into ICOs in hopes of particpating in the financial gains of similar to those enjoyed by early Bitcoin or Ethereum speculators.[36]

Regulation

The regulatory treatment of cryptocurrencies is evolving and is complex.

Cryptocurrencies are based on distributed ledger technologies which enable anyone to purchase or transfer their cryptocurrency holdings to any other person without the need for an intermediary (such as an exchange) or to update a central record of ownership. Cryptocurrencies can be transferred easily across national and jurisdictional boundaries. This makes it difficult for central authorities to control and monitor the ownership and movement of holdings of cryptocurrencies.

Countries have different approaches to how they regulate cryptocurrencies. This can depend on the nature of the cryptocurrency itself.

There are two main types of cryptocurrencies from a regulatory perspective - utility tokens and asset-backed tokens. Utility tokens may have value because they enable the holder to exchange the token for a good or service in the future, such as Bitcoin. Asset-backed tokens may have value because there is an underlying asset which the holder of the token can attribute value to. In many countries it is uncertain whether utility tokens require regulation, but it is more likely that asset-backed tokens do require regulation.

This makes it complex for the issuers of cryptocurrencies to analyse which countries their tokens (or coins) can be sold into, and for the prospective purchasers of cryptocurrencies to understand which regulations, if any, should apply.

The Arc Reserve Currency is the first regulated cryptocurrency[37]. Regulated by the JFSC in Jersey, UK. Its founder has committed to sharing all of their regulatory findings publicly on this Wikipedia page[38].

Jurisdiction Comments
Australia ASIC issued guidance in September 2017 stating that the legality of an ICO depends upon its detailed circumstances.[39][40]
Canada Working on regulating ICOs.[41]
China On September 4, 2017 seven Chinese financial regulators officially banned all ICOs within the People's Republic of China, demanding that the proceeds from all past ICOs be refunded to investors or face being "severely punished according to the law".[42][43][44] This action by Chinese regulators resulted in large sell-offs for most cryptocurrencies.[44] Prior to the Chinese ban, ICOs had raised nearly $400 million from about 100,000 Chinese investors.[45] A week later, however, a Chinese financial official stated on Chinese national television that the ban on ICOs is only temporary until ICO regulatory policies are in place.[46]
France As of October 2017, the Autorité des marchés financiers (AMF) was working on regulations governing the use of blockchain technology in capital raising transactions.[47]
Hong Kong The Securities and Futures Commission released a statement in September 2017 explaining that tokens may constitute securities for purposes of the Securities and Futures Ordinance, in which case dealing in such tokens would be a regulated activity under Hong Kong law.[48]
Isle of Man Working on regulating ICOs.[49]
Jersey In December 2017, the Jersey Financial Services Commission approved its first regulated ICO,[50] the Arc Reserve Currency, an asset-backed cryptocurrency based on the Ethereum blockchain.[51]
New Zealand In October 2017, the Financial Markets Authority (FMA) released guidelines on the current regulatory environment in regards to ICOs.[52]
Gibraltar In October 2017, the Government of Gibraltar published regulation establishing a framework for regulated DLT (Distributed Ledger Technology) companies to become effective on January 1, 2018. This regulation encompasses ICOs and subjects them to financial controls and standards.[53]
South Korea The Korean Financial Services Commission prohibited ICOs in September 2017 and promised "stern penalties" for violations.[54][55]
Switzerland Although Switzerland was previously viewed as a friendly jurisdiction to coin offerings, the Swiss Financial Market Supervisory Authority announced an investigation of an unspecified number of coin offerings in September 2017, and would examine whether these offerings were in compliance with Swiss regulations.[55][56]
United Arab Emirates The Abu Dhabi Global Market issued official guidance on ICOs in October 2017.[57]
United States In July 2017 the U.S. Securities and Exchange Commission (SEC) indicated that it could have the authority to apply federal securities law to ICOs.[58] The SEC did not state that all blockchain tokens (ICOs) would necessarily be considered securities, but that determination would be made on a case-by-case basis.[59] The SEC action may encourage more mainstream investors to invest in ICOs,[60][22] although ICOs typically prevent U.S. investor participation to remain out of the jurisdiction of the United States government.[61] The SEC charged Maksim Zaslavskiy for fraud in September 2017 in connection with the ICOs for RECoin and DRC World.[62] The SEC has ruled that celebrity ICO endorsements must disclose the amount of any compensation paid for the endorsement.[63] In December 2017 the SEC issued an Order stating that the utility-token ICO of Munchee Inc. was classified as a security.[5]

International ICOs may need to consider US regulations to avoid falling foul of the SEC in the event of US persons acquiring tokens. There are two choices for the coin Issuer (Company), if they are not seeking a full SEC registration:

·Rule 506(c): the token sale can be broadly solicited to an unlimited number of purchasers so long as the Company meets two conditions (1) All token purchasers in the offering must qualify as Accredited Investors; and (2) The Company must have undertaken reasonable steps to verify that all purchasers are Accredited Investors.

·Regulation S: should the Company choose to exclude US token purchasers they may do so under Regulation S of the Securities Act. Among other requirements, (i) the Company must verify that the token sale is made outside of the US to non-US persons (ii) there are no direct selling efforts made in the US and (iii) the securities or tokens will not be transferred to investors or token purchasers in the US or to US persons for at least one year following the original token sale.

See also

References

  1. ^ Initial Coin Offerings (ICOs): Risks, Regulation, and Accountability. Regulation of Financial Institutions Journal: Social Science Research Network (SSRN). Accessed 6 December 2017.
  2. ^ "ICO Bubble? Startups Are Raising Hundreds of Millions of Dollars Via Initial Coin Offerings". Inc.com. 14 July 2017. Retrieved 2017-07-18.
  3. ^ Higgs, Stan (September 20, 2017). "Japanese Billionaire: ICOs 'Democratize Venture Financing'". CoinDesk. Retrieved 2017-09-21.
  4. ^ a b Author, Guest (December 31, 2017). "ICOs Raised $4 Bln in 2017, What 2018 Has in Store". CoinTelegraph. Retrieved 2017-12-31. {{cite web}}: |last= has generic name (help)
  5. ^ a b "Company Halts ICO After SEC Raises Registration Concerns". SEC. Retrieved 2017-12-15.
  6. ^ "Carey Olsen and JTC advise ARC Fiduciary Ltd on Jersey's first ICO". Carey Olsen. Retrieved 2017-12-15.
  7. ^ "Blockchain Will Keep Growing Even After the Bans, Chinese AI Startup". Cointelegraph. 15 September 2017.
  8. ^ "In Unexpected Move, South Korean Regulator Suddenly Bans Bitcoin Futures Trading". Cointelegraph. 7 December 2017.
  9. ^ Marshall, Andrew (March 7, 2017). "ICO, Explained". CoinTelegraph. Retrieved 2017-03-08.
  10. ^ "Ethereum Raises 3,700 BTC in First 12 Hours of Ether Presale". Cointelegraph. Retrieved 2017-09-28.
  11. ^ "Karmacoin Becomes First Cryptocurrency to Issue Shares". Retrieved 27 July 2017.
  12. ^ "The Ultimate List of ICO Resources: 18 Websites That Track initial Cryptocurrency Offerings". www.startupmanagement.org. Retrieved 2017-05-31.
  13. ^ "$35 Million in 30 Seconds: Token Sale for Internet Browser Brave Sells Out". CoinDesk. May 31, 2017. Retrieved 2017-06-01.
  14. ^ "Kik ICO Ends Strongly With Nearly $100 Mln Raised". Cointelegraph. 29 Sep 2017.
  15. ^ "Coinschedule ICO Stats". Coinschedule. October 3, 2017. Retrieved 2017-10-03.
  16. ^ Hof, Robert (August 25, 2017). "Why initial coin offerings are exploding – and how companies can avoid the landmines". siliconANGLE.com. Retrieved 2017-08-31.
  17. ^ "Bankers Ditch Fat Salaries to Chase Digital Currency Riches". Bloomberg.com. 2017-07-25. Retrieved 2017-08-05.
  18. ^ "CoinDesk ICO Tracker". CoinDesk. September 1, 2017. Retrieved 2017-09-14.
  19. ^ "ICOarray". icoarray.com. Retrieved 2017-11-09.
  20. ^ "Elite Performing ICO's of 2017 - Investing in Cryptocurrency". Retrieved 2018-01-03.
  21. ^ "$75 Million Goal: Kik ICO Kicks Off to Small Scams and Big Demand - CoinDesk". CoinDesk. 2017-09-12. Retrieved 2017-10-10.
  22. ^ a b "Why Your Initial Coin Offering Is Probably Regulated By Securities Law". Crowdfund Insider. 6 March 2017. Retrieved 27 July 2017.
  23. ^ Ohtamaa, Mikko (September 7, 2017). "The regulation of token sales under international securities laws". TOKENMARKET.NET. Retrieved 2017-09-07.
  24. ^ Geron, Tomeo (September 24, 2017). "How Blockchain and ICOs Are Changing the Funding Game for Startups". The Wall Street Journal. Retrieved 2017-09-25.
  25. ^ "ICO Market Research: The Leading Blockchain Platforms Of 2017 - ICO Watch List Blog". ICO Watch List Blog. 2017-08-17. Retrieved 2017-09-28.
  26. ^ "ICO Market Research: The Leading Blockchain Platforms Of 2017 - ICO Watch List Blog". ICO Watch List Blog. 2017-08-17. Retrieved 2017-08-17.
  27. ^ Bendella, Wassim. "Exploits, Hacks, Phishing, Ponzi Are on the Rise on Ethereum". COINTELEGRAPH. Retrieved 2017-08-20.
  28. ^ "Ethereum Scam Database". ethereumscamdb.info. Retrieved 2017-08-20.
  29. ^ Shin, Laura. "Are ICOs For Utility Tokens Selling Securities? Prominent Crypto Players Say Yes". Forbes. Retrieved 2017-11-14.
  30. ^ Graham, Luke (2017-09-06). "China ICO ban will help prevent crypto scams but could create regulatory competition, experts say". CNBC. Retrieved 2017-10-10.
  31. ^ Roberts, Jeff John. "SEC Warns of New Pump and Dump Scam". Fortune. Retrieved 2017-10-09. {{cite news}}: Cite has empty unknown parameter: |dead-url= (help)
  32. ^ Clements, Lana (2017-09-17). "Bitcoin scam alert: ICO fraud warning for investors from watchdog". Express.co.uk. Retrieved 2017-10-10.
  33. ^ "ESMA alerts investors to the high risks of Initial Coin Offerings (ICOs)" (PDF). Retrieved December 15, 2017.
  34. ^ Ozelli, Selva (November 26, 2017). "ICOs Flow Continues As Regulations Fall Around the World: Expert Blog". COINTELEGRAPH. Retrieved November 26, 2017.
  35. ^ "The ICO bubble is about to burst... but that's a good thing Expect a slowdown in ICOs in 2018, as token sales become less of a Wild West". Wired. 12 December 2017. {{cite web}}: Unknown parameter |deadurl= ignored (|url-status= suggested) (help); line feed character in |title= at position 60 (help)
  36. ^ "Explaining the new cryptocurrency bubble—and why it might not be all bad Investors are pouring tens of millions of dollars into new cryptocurrencies". Arstechnica. 5 October 2017.
  37. ^ Template:Url=https://www.arccy.org
  38. ^ Template:Url=https://medium.com/arc-blog/wiki-for-cryptosecurity-regulation-69a1a230c5de
  39. ^ "Subscribe | theaustralian". www.theaustralian.com.au. Retrieved 2017-10-09.
  40. ^ "ASIC provides guidance for initial coin offerings". Australian Securities and Investments Commission. September 28, 2017. Retrieved 2017-11-23.
  41. ^ Stanley, Aaron (September 6, 2017). "ICO Ban? Canada's Regulators Are Giving One Token Sale a Big Break". CoinDesk. Retrieved 2017-09-07.
  42. ^ Chuan, Tian (September 4, 2017). "China Outlaws ICOs: Financial Regulators Order Halt on Token Trading". CoinDesk. Retrieved 2017-09-04.
  43. ^ Information and Communication Technology (September 4, 2017). "Seven departments on the prevention of tokens issued financing risk notice". Ministry of Industry and Information Technology. Retrieved 2017-09-04.
  44. ^ a b Vigna, Paul (September 4, 2017). "China Bans Digital Coin Offers as Celebrities Like Paris Hilton Tout Them". The Wall Street Journal. Retrieved 2017-09-05.
  45. ^ Ou, Elaine (September 6, 2017). "Go Ahead, Try to Stop Initial Coin Offerings". Boomberg View. Retrieved 2017-09-07.
  46. ^ Young, Joseph (September 10, 2017). "China Ban on ICO is Temporary, Licensing to be Introduced: Official". CoinTelegraph. Retrieved 2017-09-10.
  47. ^ "France Is Close to Issuing a Position on ICOs - CoinDesk". CoinDesk. 2017-10-09. Retrieved 2017-10-10.
  48. ^ "Statement on initial coin offerings". Securities and Futures Commission. 2017-09-05. Retrieved 2017-10-24. {{cite web}}: Cite has empty unknown parameter: |dead-url= (help)
  49. ^ Higgs, Stan (September 6, 2017). "ICOs Welcome: Isle of Man to Unveil Friendly Framework for Token Sales". CoinDesk. Retrieved 2017-09-07.
  50. ^ "Carey Olsen and JTC advise ARC Fiduciary Ltd on Jersey's first ICO". Retrieved 15 December 2017.
  51. ^ https://www.arccy.org. Retrieved 15 December 2017. {{cite web}}: Missing or empty |title= (help)
  52. ^ "Initial coin offers". fma.govt.nz. Retrieved 15 November 2017.
  53. ^ "Government confirms introduction of Government confirms introduction of confirms introduction of Distributed Ledger Technol Distributed Ledger Technology (DLT) ogy (DLT) Regulatory Framework Regulatory Frameworkin January 2018 in January 2018".
  54. ^ "South Korea bans raising money through initial coin offerings". Reuters. 2017-09-29. Retrieved 2017-10-09. {{cite news}}: Cite has empty unknown parameter: |dead-url= (help)
  55. ^ a b Popper, Nathaniel (2017-09-29). "New Virtual Currencies Hit Barriers in U.S. and 2 Other Nations". The New York Times. ISSN 0362-4331. Retrieved 2017-10-09.
  56. ^ FINMA, Eidgenössische Finanzmarktaufsicht. "FINMA - FINMA is investigating ICO procedures". www.finma.ch. Retrieved 2017-11-11.
  57. ^ Diaa, Sarah (2017-10-09). "Abu Dhabi Global Market sets guidance on initial coin offerings, virtual currencies". GulfNews. Retrieved 2017-10-09. {{cite news}}: Cite has empty unknown parameter: |dead-url= (help)
  58. ^ Higgins, Stan (July 25, 2017). "SEC: US Securities Laws 'May Apply' to Token Sales". CoinDesk. Retrieved 2017-07-25.
  59. ^ del Castillo, Michael (July 26, 2017). "'Not a Surprise': Blockchain Industry Saw SEC ICO Action Coming". CoinDesk. Retrieved 2017-07-26.
  60. ^ Mougayar, William (July 26, 2017). "Token Summit Creator: SEC ICO Guidance a 'Breath of Fresh Air'". CoinDesk. Retrieved 2017-07-26.
  61. ^ Buntinx, JP (July 29, 2017). "Blockchain CEOs Respond to SEC ICO Verdict". THE MERKLE. Retrieved 2017-07-29.
  62. ^ Buhr, Sarah. "The SEC has charged two initial coin offerings with defrauding investors". TechCrunch. Retrieved 2017-10-09.
  63. ^ Higgins, Stan (3 November 2017). "SEC: Celebrity ICO Endorsements Could Be Illegal". coindesk. Retrieved 3 November 2017. {{cite web}}: Cite has empty unknown parameter: |dead-url= (help)
Retrieved from "https://en.wikipedia.org/w/index.php?title=Initial_coin_offering&oldid=818430618"