What is an ICO? With the success of Bitcoin, there are many cryptocurrency projects popping up. ICO’s, known as Initial Coin Offerings, is a way that these projects gain funding. ICO’s are similar to an Initial Public Offering ( IPO ) in which investors purchase shares of a company.
What is an ICO and how does it work?
One person or a team of people come up with an idea to start-up a new business. For this, they need funding to start development, so instead of trying to find funding from venture capitalists or banks, they turn to the greater community. Firstly, the ICO project team is required to write a detailed document outlining how the business or system would work and why it is a good idea. Then the marketing begins in the quest to find investors and participants to send money ( Fiat currency, Bitcoin or Ethereum ) in return for the project’s coin or token.
What are the benefits of an ICO?
Benefits for the token issuer is that they have a much faster funding process to create new decentralised business models vs the traditional venture capital route. During the ICO token sale, a network of incentivized investors and participants is built, supporting the project and “boot-strapping” the ecosystem.
The benefits of investing in an ICO is participating in a new project, technology or service. There is also an opportunity to gain financially should the token price increase as the project is delivered.
However, there are risks…
For the token issuer, regulation is still uncertain and due to this, their project could either be shut down by regulators and/or be fined, sent to jail or instructed to return the funds. Other issues that could arise is that the community or user base become disillusioned with the project and sell-off their tokens to the detriment of the token price. Token holders are generally not known vs shareholders gained via the traditional route.
The risk for the holder of the tokens is that there is absolutely no guarantee the project will be developed and delivered or is there no regulatory protection for your investment. ICO’s can be started with as little as a whitepaper and a few lines of code.
Be warned – ICOs are highly risky and have a high potential for scams
Recently reported in May 2018, as much as 92 percent of all blockchain projects fail – Only 8% of 0ver 80,000 blockchain projects launched globally, are maintained. Also, the average lifespan is only around 1.22 years.
An official at the China Academy of Information and Communications Technology (CAICT), He Baohong, stated that “These projects came out very quickly, but die quickly as well. In this circumstance, governments globally are accelerating their efforts to establish unified standards in order to help blockchain projects to achieve real-life applications.”
The history of ICO’s
In early 2013 Ripple Labs began to develop the Ripple payment system and created around 100 billion XRP tokens which were sold to fund the development of the Ripple platform. Ripple is one of the first projects to be labeled “never-ending ICO” as reported by Bloomberg in May 2018. Ripple Inc. was hit by a lawsuit alleging that it led a scheme to raise hundreds of millions of dollars through unregistered sales of its XRP tokens. The saga continues.
In 2013 Mastercoin planned to build a layer on top of Bitcoin. They sold the Mastercoin-token to investors and 10,000 Bitcoin were received by the developers, approximately $1 million at the time. Mastercoin token gained in value and some investors made huge profits. Mastercoin later merged with Counterparty and Omni.
In mid-2014 the Ethereum Foundation sold ETH against 0.0005 Bitcoin each and received approximately $20million. This was one of the largest and most successful crowdfunding projects. Ethereum was successfully developed and interestingly enough, many ICO’s are build on the Ethereum network – ERC20 Token Standard
In 2017, the introduction of new ICO’s into the cryptocurrency market has rocketed as can be seen by the graphs below:-
Top 20 grossing ICO’s including one high profile failure in this list
Source:- Token Data – tokendata.io
ICO’s are a Hot Topic
After ICOs emerged in 2013, they quickly gained momentum as new ICO’s entered the market fast and furious. Due to the popularity of ICO’s, the subject became a hot topic amongst the blockchain community as well as governments and regulators.
Governments such as China and South Korea decided to “calm the ICO waters” and in September 2018, Chinese regulators banned Initial Coin Offerings (ICOs) as well as instructed exchanges based in the country to cease all crypto-to-fiat currency trading services. To date, they have not relented on their decision to lift the ICO’s ban. South Korea followed the same path to ban ICO’s very shortly after China’s announcement. According to Business Korea publication, the National Assembly tabled a recommendation in 2018.
“We need to form a task force including private experts in order to improve transparency of cryptocurrency trading and establish a healthy trade order. The administration also needs to consider setting up a new committee and building governance systems at its level in a bid to systematically make blockchain policy and efficiently provide industrial support. We will also establish a legal basis for cryptocurrency trading, including permission of ICOs, through the National Assembly Standing Committee.”
A security… to be or not to be
ICO projects can be seen as unregulated securities. ICO founders raise an enormous, sometimes, unjustified amount of capital by selling their tokens to investors and speculators. Many investors believe the ICO funding process is an innovation on traditional funding via venture capitalists and should not be regarded as a security. To check whether or not a token is a security or not, it should take the Howey test, and if it passes, the token must be treated as a security which will be subject to restrictions imposed by the SEC – The US Securities Exchange Commission.
XRP is not a security, asserts Ripple as it faces a third lawsuit reports BraveNewCoin:-
“In the latest lawsuit against the firm, a private investor alleges that Ripple have conflated the XRP token with the Ripple transaction technology, making them guilty of both price manipulation and illegally trading securities. Filed in the state of California, the plaintiff David Oconer claims that XRP has “all the traditional hallmarks of a security”, without being registered as such.
This is the third lawsuit to find fault with Ripple’s centralized distribution model, which has seen the firm essentially create billions of XRP tokens out of nothing, to be sold to the public on what the plaintiff claims is the false premise that their value is related to the efforts of Ripple Labs, the software company.
This funding model has catapulted the senior staff of Ripple to prosperity, and made the firm one of the most valuable startups in history. Ripple has not yet issued comment on the lawsuit, but said in May that it continues “to believe XRP should not be classified as a security.” Read the full article here
Some guidelines from the SEC for investors/participants
Here is the Statement on Cryptocurrencies and Initial Coin Offerings by SEC Chairman Jay Clayton tabled during December 2017:-
“The world’s social media platforms and financial markets are abuzz about cryptocurrencies and “initial coin offerings” (ICOs). There are tales of fortunes made and dreamed to be made. We are hearing the familiar refrain, “this time is different.”
The cryptocurrency and ICO markets have grown rapidly. These markets are local, national and international and include an ever-broadening range of products and participants. They also present investors and other market participants with many questions, some new and some old (but in a new form), including, to list just a few:
- Is the product legal? Is it subject to regulation, including rules designed to protect investors? Does the product comply with those rules?
- Is the offering legal? Are those offering the product licensed to do so?
- Are the trading markets fair? Can prices on those markets be manipulated? Can I sell when I want to?
- Are there substantial risks of theft or loss, including from hacking?”
Read the full statement – Click Here
Links to help you keep an eye on the latest ICO’s
Remember – do your research on ICO’s before investing and only invest what you can afford to lose – Cryptocurrency is a free market and there is no way to determine price post-launch vs ICO price. Initial Coin Offerings (“ICOs”) are highly risky and speculative.