Catching the ICO Wave: Promises and Pitfalls

In the crypto world, Initial Coin Offerings or ICOs seem to be the rage these days among both startups as well as investors. With funding being vital to a successful business launch, ICOs offer an alternative to traditional venture capital and crowdfunding campaigns. They also provide a viable option for investors looking for new ways to secure a healthy return on their money.

So what exactly are ICOs? According to the website Investopedia they are defined as:  

An unregulated means by which funds are raised for a new cryptocurrency venture. An Initial Coin Offering (ICO) is used by startups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks. In an ICO campaign, a percentage of the cryptocurrency is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, but usually for Bitcoin.

Sasha Ivanov

Sasha Ivanov, founder and ceo of the blockchain-powered custom tokens platform Waves, says there are several benefits of an ICO campaign over a traditional fundraising strategy. The first is that you can fund a project without the strings that come with other forms of investment. VCs, he says, will always want a degree of control, and often desire to own a significant proportion of your company. And a bank loan, he notes – if you can get one – means you have to pay the interest every month, whether your company is generating revenues or not. If you can’t pay, you default and lose your business too.

Crowdfunding, says Ivanov, provides a startup with the ability to receive money up-front to develop and market a product, but without the same kinds of conditions that so many entrepreneurs and small businesses find unappealing or untenable.

Another advantage according to Ivanov is that a crowdfunding campaign like an ICO means that your investors as people are also one of your biggest assets.

“Their interests are aligned with yours. They are your testers, your feedback groups, your first customers, your evangelists. As a result, every dollar you raise from them comes with additional value built in.”

TaaS: A Coin Offering Use Case

TaaS, a tokenized closed end fund (CEF) dedicated to blockchain assets has an initial coin offering that began on March 27, 2017 and will run until April 27, 2017.

TaaS Co-Founder Konstantin Pysarenko believes that the biggest challenge in setting up an ICO is the lack of a single, shared success story that everyone can refer to.

“2016 was the first year of the ICO boom with the potential of ICOs being recognized. So many talented and bright entrepreneurs are joining this phenomenon and developing an infrastructure to help startups conduct ICOs successfully. However, the problem is that most of them act as freelancers and not as entities so advancing to a more organized, cohesive environment is definitely something that is yet to come,” says Pysarenko.

He notes that since there is no standardized legal framework among blockchain-tolerant countries, TaaS had to go through many jurisdictions to determine needs and future requirements. TaaS, he says, eventually chose Singapore because it is one of the most progressive countries in terms of keeping an eye on the development of new technologies.

His greatest hope for the TaaS ICO campaign?  “That we can fully deliver the message to all interested parties that TaaS is a first-of-its-kind project delivering transparency to its investors through a Token-as-a-Service business model. We intend to use the funding for active trading in the blockchain markets, as well as for building Kepler, a portfolio management and risk analytics platform.”

Possibilities and Cautionary Tales

Joe Ciccolo, Founder of BitAML, a firm that provides AML compliance solutions for digital currency startups says that while crowdfunding regulation should certainly be top of mind for new ICOs, the greater concern would be securities regulation.

“There’s no wait-and-see here. The ‘Howey Test’, which derives its name from the famous Supreme Court case, is a four-prong analysis used to determine if one is offering or participating in an investment contract. Whether we’re talking about leasing orange groves, digital assets, or anything in-between, the Howey Test is the tried and true litmus test to determine if one is offering securities,” said Ciccolo.

Ciccolo sees the ICO space as unchartered territory. “Domestically, ICOs must first conduct the ‘Howey Test’ to determine if they are offering an investment contract. If so, they are subject to securities regulation.”

In terms of global ICO campaigns launched outside the U.S., Ciccolo responds: “These are subject to the laws and regulations of that particular country. It’s important to know, depending upon the circumstances, that the U.S. government could exercise what’s called ‘extraterritorial jurisdiction’ should the ICO have ties to the United States, including U.S. customer base or company officers.”

Concludes Ciccolo: “Potential investors should certainly do their homework before participating in any investment, whether it’s an ICO funding round or a traditional asset. ICOs are new, exciting, and intriguing, so there’s likely a fear of missing out. Investors need to step back, remain disciplined, ask questions, and do their research.”