Initial Coin Offerings (ICOs) represent the latest innovation in online investment in companies. By offering company-backed cryptocurrencies or sales of tokens created by the company, businesses give investors an ownership interest in their business without needing to sell equity or incur debt as traditionally done.
Crowdfunding, ICOs, and the SEC: A Brief Timeline
Time flies in the world of digital commerce. A decade ago, Fundable and Kickstarter exploded onto the scene with online crowdfunding opportunities designed to allow users to "invest" in startups and product research. Depending on contribution levels, investors/donors would then receive goodies including finished products as rewards. Over time, other crowdfunding sources developed, such as Indiegogo. While not all crowdfunding platforms operate as securities, at least some do. In order to protect investors and normalize crowdfunded ventures for equity and other securities offerings, the JOBS Act was enacted to adapt the Securities Act of 1933 to the new realities of capital markets. The JOBS Act, and the crowdfunding provisions within in (Title II, Title III, and Title IV) made it legal for crowdfunding to be used for investment purposes (as opposed to donation/rewards purposes only). Use of the JOBS Act, especially Title II which allowed for general solicitation to find accredited investors.
And now, enter yet another development in this story: the ICO. ICOs are generally offerings of digital tokens protected by cryptographic methods that are offered by companies to investors. Because they generally are offerings of tokens themselves as opposed to the equity of the sponsoring company, they allow a company to raise capital in a manner that does not dilute their equity. ICOs also have additional advantages in the sense that they generally rely on distributed ledger technology which can provide better tracking and are easier to trade between investors (subject to legal restraints). It’s important to note that ICOs often are of securities, and are regulated by the Securities Exchange Commission (SEC) in the US. As a general rule, a token counts as a security if the company receives money in exchange for the token, and the owner of the token now expects to receive some investment benefit in return.
Are ICOs Safe?
Crowdfunding, cryptocurrency, and now ICOs all represent a shift toward a different kind of capital markets model, one in which increasing numbers of people have access to technology and investment opportunities around the world. As with any potential investment, there is always an element of buyer beware. Not all ICOs are safe, but then again no investment is ever completely safe. As ICOs are emerging financial trend backed by an emerging technology, investors should take special care, above and beyond what they would take with a standard investments. That said, ICOs can offer investors a ground floor opportunity to get invested in something that will change the world. Avoiding an ICO simply because it is an ICO may also be the kind of investment mistake you live to regret. Investigate potential investments and read the fine print carefully, as you would with any IPO.
Are ICOs a Good Way to Offer Crowdfunding Opportunities to Investors?
On flip-side of the proverbial coin, ICOs can provide valuable opportunities to businesses looking for innovative ways to draw potential investors to the table. Offering ICOs can help you to reach investors without having to give up any equity in your underlying company. In addition, offering "tokens" or “coins” in this way can signal to potential investors that you are savvy in new technology. Crowdfunding allows you to reach out to the investors you want, and a successful ICO generally requires a successful crowdfunding campaign.
That said, if you are considering an ICO, there are some cautions to keep in mind. ICOs sold as securities in your company are subject to the same rules as other securities. Rule 506(c) ICOS can only be sold to verified accredited investors, for example. ICOs offered for trading or sale on a cryptocurrency exchange, and the exchanges themselves, may be regulated as well. Certain other laws, such as commodities laws or the Bank Secrecy Act may apply as well.
ICOs and the Future of Crowdfunding
Although it is still too soon to say for sure where the future will lead, crowdfunding has opened the door to cryptocurrency investment via ICOs. At the moment, at least, ICO seems poised to form a key part of future investment strategies. Whether you are an investor, a business seeking investors, or both, keep your eye on ICOs, because they're going to be here for a while.