The New Kid on the Block: The Emergence of Initial Coin Offerings

Image found on https://bitcoin.org/img/icons/opengraph.png.[1] 

By: India McGee

Virtual currencies have been used in unimaginable ways since their emergence. A virtual currency is a digital currency which can be used to substitute tangible cash. Presently, virtual currencies are not issued by financial institutions or recognized by the American government, but have become legitimized through popularity and their increasing monetary value.[2] Recently, technology start-up companies have started using virtual currencies to raise capital.[3]  Tech companies have initiated this process through Initial Coin Offerings (“ICO”).[4] ICOs  are similar to Initial Public Offerings (“IPO”), whereby a corporation sells its shares of stock to raise capital; however, with an ICO, a company sells digital assets called “tokens.”[5]

Hundreds of companies have started using ICOs to raise capital.[6] July saw the highest use of ICOs, with “34 projects raising $665 million.”[7] Since the inception of ICOs, a total of $1 billion has been raised for start-ups.[8] Some of the projects that have been funded by ICOs include “a web browser which eliminates intermediaries in digital advertising, a decentralized prediction market, and a blockchain based marketplace for insurance and insurance brokers.”[9] Additionally, investors have enjoyed high financial profits because of  ICOs.[10] For example, some investors have acquired a 10,000% profit with the ICO of ETH, which is a type of token issued during ICOs.[11]

ICOs are extremely innovative; however, the lack of regulation surrounding ICOs is problematic. Unlike IPOs, which are heavily regulated by the United States Securities and Exchange Commission (“SEC”), ICOs have yet to be regulated.[12] In July, the SEC issued a warning to companies engaging in ICOs, stating that the tokens were securities and that any tokens that functioned as a security would be regulated by the SEC.[13] Many of the companies have not taken caution to the warning.[14] Since the warning, 204 companies have commenced the fundraising trend.[15] As of September, the amount of money raised from ICOs exceeded $2 billion.[16] ICOs raise a legitimate concern because the lack of regulation increases the potential for fraud against investors. ICOs need to be regulated to safeguard investors and to promote disclosures, which help investors make informed decisions.

Without proper regulatory mechanisms in place, investors are continuously at risk for fraud and lost profit. This is exemplified with cryptocurrencies such as IOTA-Token, which did not live up to their ICO value.[17] IOTA-Token’s ICO fell in value by 20.16 points causing investors to lose their money and not profit from their investment.[18] IOTA-Token reflects the cryptocurrencies’ volatile market and demonstrate why it is best for investors not to invest in them. Further, investors have been subject to ICO scams such as companies only describing what their company will produce without developing a tangible product.[19] Thus, ICOs should be regulated similarly to IPOs, which require adequate and material disclosures to protect investors from making ill-informed decisions.

[1] Image found on https://bitcoin.org/img/icons/opengraph.png.

[2] Investopedia, Convertible Virtual Currency, http://www.investopedia.com/terms/c/convertible-virtual-currency.asp

[3] Nathaniel Popper, Despite S.E.C. Warning, Wave of Initial Coin Offerings Grows, NYTimes (Aug. 7, 2017), https://www.nytimes.com/2017/08/07/business/dealbook/initial-coin-offerings-sec-virtual-currency.html?smid=li-share

[4] Id.

[5] Mike Orcutt, What the Hell Is an Initial Coin Offering?, MIT Technology Review (Sept. 6, 2017), https://www.technologyreview.com/s/608799/what-the-hell-is-an-initial-coin-offering/

[6] Popper, supra note 2.

[7] Id.

[8] Id.

[9] Orcutt, supra note 4.

[10] What is an Initial Coin Offering? Raising Millions in Seconds, Blockgeeks, https://blockgeeks.com/guides/what-is-an-initial-coin-offering/

[11] Id.

[12] Orcutt, supra note 4.

[13] Id.

[14] Id.

[15] Popper, supra note 2.

[16] Lily Katz, Initial Coin Offerings Rake in Another Billion Under 2 Months, Bloomberg, (Oct. 16, 2017, 5:26PM), https://www.bloomberg.com/news/articles/2017-10-16/initial-coin-offerings-rake-in-another-billion-in-under-2-months

[17] Supra note 9.

[18] Lester Coleman, IOTA Falls Hard Again, Topping Nearly All Crypto Losses, Cryptocoins News, (Jun. 26, 2017), https://www.cryptocoinsnews.com/iota-falls-hard-topping-nearly-crypto-losses/

[19] Supra note 9.

Leave a Reply

Your email address will not be published. Required fields are marked *