With the rise of blockchain technology in recent years and the surge in prices of cryptocurrencies in 2017, initial coin offerings (ICOs) have taken investors (both institutional and private) worldwide by the storm.
Many start-ups (especially tech-related businesses) have been drawn to ICOs, not only because of their openness, but because they require fewer sophisticated resources and procedures compared to the traditional fund-raising methods.
What Is an ICO and How it Works
For an ICO, the issuer creates “tokens” (in the form of intangible cryptocurrency). Tokens are then offered for sale through a blockchain (a decentralised digital ledger).
Among investors, an ICO is often compared to an IPO (initial public offering). But although they do share some commonalities, the former is much more versatile because its use is not limited to capital-raising.
There are 2 major types of tokens that can be issued in an ICO:
- Security (or speculative) tokens: Akin to stocks in an IPO, security tokens are sold to the general public, in exchange for either fiat money or other pre-existing cryptocurrency, in order to raise capital. Investors may then freely trade their tokens on cryptocurrency platforms or cash out.
Science Blockchain, which incubates blockchain and cryptocurrency-related businesses, is one of the most notable companies that used an ICO to offer security tokens. The ICO raised over $12 million USD for the company.
- Utility tokens: As opposed to security tokens, utility tokens are not designed for investments, but are offered as a form of pre-sale of a commodity. Holders are entitled to redeem products or services offered by the issuer at a later time. These tokens are often issued in an ICO for crowdfunding purposes, since they allow budding businesses to raise funds in a short time.
Bankera, which gives token-holders access to their decentralised banking services, raised more than $100 million USD during their crowd sale.
Opportunities and Risks
Blockchain technology and ICOs undoubtedly possess great potential, and there is no lack of successful ICOs.
Nonetheless, failed cases do exist. Moreover, regulations in different jurisdictions vary significantly. Since ICOs are still in the stage of constant development, even the laws within a jurisdiction may occasionally change.
Accordingly, interested investors and institutions planning to launch an ICO are reminded to always keep an eye on relevant existing regulations and the introduction of new regulatory regimes. They should ensure that they are fully aware of and prepared for the potential risks.
The information provided here is intended to give general information only. It is not a complete statement of the law. It is not intended to be relied upon or to be a substitute for legal advice in relation to particular circumstances.