Insights

Initial Coin Offering (ICO) – Raising Capital in Seconds

Initial Coin Offering (ICO) – Raising Capital in Seconds

At the end of 2017, cryptocurrency mania swept the world. With Bitcoin prices rising at unbelievable rates, everyone wanted to join the Bitcoin millionaire club. The whole world took interest in investing in cryptocurrency. The market expanded and many altcoins flooded the crypto market. Since Bitcoin was the first in the space, Bitcoin is considered a cryptocurrency and all the other coins, such as Ethereum, Litecoin or Ripple, are considered alternative cryptocurrency coins (Altcoins). 

Then another opportunity was uncovered, initial coin offering in the form of tokens. Tokens represent a particular asset that is fungible and tradable. Tokens can represent commodities, loyalty points or even other cryptocurrency. Tokens are created and distributed to the public through an initial coin offering (ICO). Each release of a new token can be a way to fund a project development or sale a share of a company.

An ICO can be a source of fast capital for startup companies. ICOs are very similar to initial public offerings (IPOs) but avoid the cost of intermediaries, such as investment banks and stock exchanges. However, companies considering offering an ICO should consult legal counsel since some ICOs, based on specific facts, may be considered securities offerings and can fall under federal securities laws and may need to be registered with the U.S. Securities and Exchange Commission (SEC). Due to the different security laws from country to country, many companies choose to launch their ICO in countries other than the United States.

Due to many fraudulent ICO schemes, the SEC warns the public of the risk they might be taking when investing in ICOs. The SEC is also actively protecting investors by shutting down unlawful platforms or fining unregistered ICOs that pass the “Howey Test.” The Howey Test is a test created by the Supreme Court for determining whether certain transactions qualify as “investment contracts.” If the transactions pass the test, then under the Securities Act of 1933 and the Securities Exchange Act of 1934, the transactions are considered securities and therefore subject to certain disclosure and registration requirements. The SEC also set up a website to illustrate what a fraudulent ICO may look like. While some ICOs may be real investment opportunities, many may be frauds.

For more information, see the U.S. Securities and Exchange Commission website: https://www.sec.gov/ICO

Author(s)

Agnes Raz
Agnes Raz, CPA
Senior Manager
View Profile