Initial coin offering
An initial coin offering (ICO) or initial currency offering is a type of funding using cryptocurrencies. Mostly the process is done by crowdfunding but private ICO's are becoming more common. In an ICO, a quantity of cryptocurrency is sold in the form of "tokens" ("coins") to speculators or investors, in exchange for legal tender or other cryptocurrencies such as Bitcoin or Ethereum. The tokens sold are promoted as future functional units of currency if or when the ICO's funding goal is met and the project launches. In some cases like Ethereum the tokens are required to use the system for its purposes.
An ICO can be a source of capital for startup companies. ICOs can allow startups to avoid regulatory compliance and intermediaries such as venture capitalists, banks and stock exchanges. ICOs may fall outside existing regulations, depending on the nature of the project, or be banned altogether in some jurisdictions, such as China and South Korea.
ICOs have been prone to scams and securities law violations. Fewer than half of all ICOs survive four months after the offering, while almost half of ICOs sold in 2017 failed by February 2018. Despite their record of failure and the falling prices of cryptocurrencies, a record $7 billion was raised via ICO from January–June 2018.
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, raising 3,700 BTC in its first 12 hours, equal to approximately $2.3 million at the time.
ICOs and token sales became popular in 2017. There were at least 18 websites tracking ICOs before mid-year. In May, the ICO for a new web browser called Brave generated about $35 million in under 30 seconds. Messaging app developer Kik's September 2017 ICO raised nearly $100 million. 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. As of November 2017, there were around 50 offerings a month, with the highest-grossing ICO as of January 2018, being Filecoin raising $257 million (and $200 million of that within the first hour of their token sale).
By the end of 2017, ICOs had raised almost 40 times as much capital as they had raised in 2016, although still amounting to less than two percent of the capital raised by IPOs. According to industry newsletter Cointelegraph, companies raised around $6 billion via ICOs in 2017; 37% of that amount was made by only 20 ICOs. Already by February, 2018, an estimated 46% of the 2017 ICOs had failed.
ICOs are sometimes called "token sales". Amy Wan, a crowdfunding and syndication lawyer, described the coin in an ICO as "a symbol of ownership interest in an enterprise—a digital stock certificate" stating that they are likely subject to regulation as securities in the U.S. under the Howey test.
Ethereum is (as of February 2018) the leading blockchain platform for ICOs with more than 80% market share. Tokens are generally based on the Ethereum ERC-20 standard. According to Cointelegraph the Ethereum network ICOs have resulted in considerable phishing, Ponzi schemes, and other scams, accounting for about 10% of ICOs.
On January 30, 2018, Facebook banned advertisements for ICOs as well as for cryptocurrencies and binary options. By April 9, 2018, ICO advertising has been banned not only by Facebook, but by Twitter, Google, and MailChimp. Facebook has since changed their mind and June 26, 2018 announced to reopen for approved advertisers
As a mechanism for scams
Well ICOs can be used for fraud, they are also used for legal activities such as corporate finance and charitable fundraising. The 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.
Snapchat, LinkedIn and MailChimp all have limited companies from marketing ICOs via their platforms. Jimmy Wales, founder of Wikipedia, stated in 2017 that "there are a lot of these initial coin offerings which in my opinion are absolute scams and people should be very wary of things that are going on in that area."
The UK Financial Conduct Authority has 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. The European Securities and Markets Authority (ESMA) notes high risks associated with ICOs and the risk that investors may lose all of their cash.
As a bubble
A 2017 Wired article predicted in 2017 that the bubble was about to burst. Some investors have flooded into ICOs in hopes of participating in the financial gains of similar size to those enjoyed by early Bitcoin or Ethereum speculators.
Following a speculative boom in cryptocurrency prices that peaked in December 2017, regulation of cryptocurrencies has been rapidly changing. The pace of change has been driven in part by incidents of cybertheft, trading halts, and possible market manipulation.
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 Gibraltar British Overseas Territory Financial Services Commission announced in early February 2018 that regulations are being developed to qualify "authorized sponsors" of ICOs, who are supposed to be "responsible for assuring compliance with disclosure" and compliance with "financial crimes rules".
|Australia||ASIC issued guidance in September 2017 stating that the legality of an ICO depends upon its detailed circumstances.[not in citation given]|
|Canada||Working on regulating ICOs.|
|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". This action by Chinese regulators resulted in large sell-offs for most cryptocurrencies. Prior to the Chinese ban, ICOs had raised nearly $400 million from about 100,000 Chinese investors. 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.|
|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.|
|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.|
|Isle of Man||Working on regulating ICOs.|
|Jersey||In December 2017, Arc Fiduciary Ltd, based in Jersey, launched the "Arc Reserve Currency", an asset-backed cryptocurrency based on the Ethereum blockchain., working closely with the Jersey Financial Services Regulator to achieve a workable regulatory solution for the ICO The Arc Reserve Currency does not have a continuing regulatory status, but it is a notable example of how cryptocurrency operators are increasingly working with regulators to improve the investment landscape for holders of cryptocurrencies.|
|New Zealand||In October 2017, the Financial Markets Authority (FMA) released guidelines on the current regulatory environment in regards to ICOs.|
|Gibraltar||In October 2017, the government of Gibraltar established a framework for regulating distributed ledger technology (DLT) companies, which came into law on January 1, 2018. It encompasses ICOs and subjects them to financial controls and standards.|
|South Korea||The Korean Financial Services Commission prohibited ICOs in September 2017 and promised "stern penalties" for violations.|
|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.|
|United Arab Emirates||The Abu Dhabi Global Market issued official guidance on ICOs in October 2017.|
|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. 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. The SEC action may encourage more mainstream investors to invest in ICOs, although ICOs typically prevent U.S. investor participation in order to remain out of the jurisdiction of the United States government.
The SEC charged Maksim Zaslavskiy for fraud in September 2017 in connection with the ICOs for RECoin and DRC World. The SEC ruled that celebrity ICO endorsements must disclose the amount of any compensation paid for the endorsement. In December 2017, the SEC issued an order stating that the utility-token ICO of Munchee Inc. was classified as a security. In April 2018 the SEC charged two co-founders of Centra Tech, Inc., with running a fraudulent ICO that raised more than $32 million in 2017. The company had drawn endorsements from celebrities including Floyd Mayweather Jr. and DJ Khaled.
- Higgs, Stan (September 20, 2017). "Japanese Billionaire: ICOs 'Democratize Venture Financing'". CoinDesk. Retrieved 2017-09-21.
- Schueffel, Patrick (2017). The Concise Fintech Compendium. Fribourg: School of Management Fribourg/Switzerland.
- "Company Halts ICO After SEC Raises Registration Concerns". SEC. Retrieved 2017-12-15.
- "Carey Olsen and JTC advise ARC Fiduciary Ltd on Jersey's first ICO". Carey Olsen. Retrieved 2017-12-15.
- Shifflett, Shane; Jones, Coulter (May 17, 2018). "Buyer Beware: Hundreds of Bitcoin Wannabes Show Hallmarks of Fraud". Wall Street Journal. Retrieved May 18, 2018.
- "ICO – HOWEYCOINS If You Responded To An Investment Offer Like This, You Could Have Been Scammed – HoweyCoins Are Completely Fake!". Investor.gov. U.S. Securities and Exchange Commission. Retrieved May 18, 2018.
- Chohan, Usman. "Initial Coin Offerings (ICOs): Risks, Regulation, and Accountability". Regulation of Financial Institutions Journal. Discussion Paper Series: Notes on the 21st Century. doi:10.2139/ssrn.3080098. Retrieved 8 February 2018.
- "ICO Bubble? Startups Are Raising Hundreds of Millions of Dollars Via Initial Coin Offerings". Inc.com. 14 July 2017. Retrieved 2017-07-18.
- Kharif, Olga (9 July 2018). "Half of ICOs Die Within Four Months After Token Sales Finalized". Bloomberg. Retrieved 13 July 2018.
- Hankin, Aaron (February 26, 2018). "Nearly half of all 2017 ICOs have failed". Fortune. Retrieved May 4, 2018.
- Robertson, Benjamin (2 August 2018). "Crypto Bulls Pile Into ICOs at Record Pace Despite Bitcoin Rout". Bloomberg. Retrieved 2 August 2018.
- Rooney, Kate (2018-05-01). "Ethereum falls on report that the second-biggest cryptocurrency is under regulatory scrutiny". CNBC. Retrieved 2018-09-11.
- "The Ultimate List of ICO Resources: 18 Websites That Track initial Cryptocurrency Offerings". www.startupmanagement.org. Retrieved 2017-05-31.
- "$35 Million in 30 Seconds: Token Sale for Internet Browser Brave Sells Out". CoinDesk. May 31, 2017. Retrieved 2017-06-01.
- "Coinschedule ICO Stats". Coinschedule. October 3, 2017. Retrieved 2017-10-03.
- Hof, Robert (August 25, 2017). "Why initial coin offerings are exploding – and how companies can avoid the landmines". siliconANGLE.com. Retrieved 2017-08-31.
- "Bankers Ditch Fat Salaries to Chase Digital Currency Riches". Bloomberg.com. 2017-07-25. Retrieved 2017-08-05.
- "CoinDesk ICO Tracker". CoinDesk. September 1, 2017. Retrieved 2017-09-14.
- "ICOarray". icoarray.com. Retrieved 2017-11-09.
- "Elite Performing ICO's of 2017". Investing in Cryptocurrency. Retrieved 2018-01-03.
- Sedgwick, Kai (2018-02-23). "46% of Last Year's ICOs Have Failed Already". Bitcoin.com. Retrieved 2018-02-23.
- "Why Your Initial Coin Offering Is Probably Regulated By Securities Law". Crowdfund Insider. 6 March 2017. Retrieved 27 July 2017.
- Geron, Tomeo (September 24, 2017). "How Blockchain and ICOs Are Changing the Funding Game for Startups". The Wall Street Journal. Retrieved 2017-09-25.
- "Ethereum Scam Database". ethereumscamdb.info. Retrieved 2017-08-20.
- Frier, Sarah; Verhage, Jules (January 30, 2018). "Facebook Bans Ads Associated With Cryptocurrencies". Bloomberg. Retrieved February 7, 2018.
- Cornish, Chloe (January 30, 2018). "Facebook and regulators move to halt cryptocurrency scams". Financial Times. Retrieved February 7, 2018.
- Puil, Cahill (2018-04-09). "How ICOs may survive the advertising prohibition era". BRAVENEWCOIN. Retrieved 2018-04-09.
- "Updates to Our Prohibited Financial Products and Services Policy". Facebook Business. Retrieved 2018-09-11.
- 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.
- Roberts, Jeff John. "SEC Warns of New Pump and Dump Scam". Fortune. Retrieved 2017-10-09.
- French, Jordan (April 2, 2018). "3 Key Factors Behind Bitcoin's Current Slide". theStreet.com. Retrieved April 2, 2018.
- Bercetche, Joumanna (October 5, 2017). "ICOs — the hottest craze in cryptocurrencies — is an 'absolute scam,' Wikipedia Founder Jimmy Wales says". CNBC. Retrieved 2018-04-02.
- Wilson, Thomas (March 28, 2018). "Twitter and LinkedIn ban cryptocurrency adverts – leaving regulators behind". Independent. Reuters. Retrieved April 3, 2018.
- Clements, Lana (2017-09-17). "Bitcoin scam alert: ICO fraud warning for investors from watchdog". Express.co.uk. Retrieved 2017-10-10.
- "ESMA alerts investors to the high risks of Initial Coin Offerings (ICOs)" (PDF). Retrieved December 15, 2017.
- "The ICO bubble is about to burst...but that's a good thing". Wired. 12 December 2017.
- "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.
- Russo, Camila; Katz, Lily; Robertson, Benjamin (March 7, 2018). "Bitcoin Steadies Amid U.S., Japan Regulatory Clampdown Concern". Bloomberg. Retrieved April 4, 2018.
- "Subscribe | theaustralian". www.theaustralian.com.au. Retrieved 2017-10-09.
- "ASIC provides guidance for initial coin offerings". Australian Securities and Investments Commission. September 28, 2017. Retrieved 2017-11-23.
- Stanley, Aaron (September 6, 2017). "ICO Ban? Canada's Regulators Are Giving One Token Sale a Big Break". CoinDesk. Retrieved 2017-09-07.
- Chuan, Tian (September 4, 2017). "China Outlaws ICOs: Financial Regulators Order Halt on Token Trading". CoinDesk. Retrieved 2017-09-04.
- 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.
- 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.
- Ou, Elaine (September 6, 2017). "Go Ahead, Try to Stop Initial Coin Offerings". Bloomberg View. Retrieved 2017-09-07.
- "France Is Close to Issuing a Position on ICOs". CoinDesk. 2017-10-09. Retrieved 2017-10-10.
- "Statement on initial coin offerings". Securities and Futures Commission. 2017-09-05. Retrieved 2017-10-24.
- Higgs, Stan (September 6, 2017). "ICOs Welcome: Isle of Man to Unveil Friendly Framework for Token Sales". CoinDesk. Retrieved 2017-09-07.
- "Arc Reserve Currency Homepage". Retrieved 15 December 2017.
- "Carey Olsen and JTC advise ARC Fiduciary Ltd on Jersey's first ICO". Retrieved 15 December 2017.
- "Initial coin offers". New Zealand Financial Markets Authority. Retrieved 15 November 2017.
- "Government confirms introduction of Government confirms introduction of confirms introduction of Distributed Ledger Technol Distributed Ledger Technology (DLT) ogy (DLT) Regulatory Framework Regulatory Framework in January 2018 in January 2018".
- "South Korea bans raising money through initial coin offerings". Reuters. 2017-09-29. Retrieved 2017-10-09.
- 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.
- "FINMA is investigating ICO procedures". FINMA. Retrieved 2017-11-11.
- Diaa, Sarah (2017-10-09). "Abu Dhabi Global Market sets guidance on initial coin offerings, virtual currencies". GulfNews. Retrieved 2017-10-09.
- Higgins, Stan (July 25, 2017). "SEC: US Securities Laws 'May Apply' to Token Sales". CoinDesk. Retrieved 2017-07-25.
- del Castillo, Michael (July 26, 2017). "'Not a Surprise': Blockchain Industry Saw SEC ICO Action Coming". CoinDesk. Retrieved 2017-07-26.
- Mougayar, William (July 26, 2017). "Token Summit Creator: SEC ICO Guidance a 'Breath of Fresh Air'". CoinDesk. Retrieved 2017-07-26.
- Buntinx, JP (July 29, 2017). "Blockchain CEOs Respond to SEC ICO Verdict". The Merkle. Retrieved 2017-07-29.
- Buhr, Sarah. "The SEC has charged two initial coin offerings with defrauding investors". TechCrunch. Retrieved 2017-10-09.
- Higgins, Stan (3 November 2017). "SEC: Celebrity ICO Endorsements Could Be Illegal". CoinDesk. Retrieved 3 November 2017.
- Al-Muslim, Aisha (April 2, 2018). "SEC Charges Startup Co-Founders with Fraudulent Initial Coin Offering". The Wall Street Journal.