"There are tales of fortunes made and dreamed to be made. We are hearing the familiar refrain, 'this time is different.'"
- Jay Clayton, Chairman of the Securities and Exchange Commission
What do Floyd ‘Money’ Mayweather and hotel heiress Paris Hilton have in common? They have both been avid promoters of initial coin offerings, or ICOs. In fact, the boxer proudly declared on his Instagram that we should now call him Floyd ‘Crypto’ Mayweather. But don’t feel bad if you’re still wondering, “What the heck is an ICO?”
An ICO is similar to an IPO - but with a crypto twist, and no regulatory hoops to jump through. In an ICO, a company raises capital by issuing digital ‘coins’ (new cryptocurrencies) to investors, which the investors pay for using existing cryptocurrencies such as Bitcoin or Ethereum. Coins can be easily traded and verified using the Blockchain. Unlike shares in an IPO, however, you do not have ownership rights in the company. Investors in ICOs are hoping that the venture will be a success, and that this will cause demand in the coins associated with the company to rise, driving up the coin value.
How successful have they been as a fundraising tool? Extremely. In 2017, an estimated US$4.9 billion was raised through ICOs. The biggest of the lot was Block.one, which raised US$700 million issuing their EOS Tokens with only an idea. Their total market cap is approximately US$6.7 billion. The company is registered in the Cayman Islands as it lacks a central office. Their website also clearly states that their tokens have no uses or purposes twice in the same sentence.
There are major issues when it comes to ICOs. Most of the companies launching ICOs have not produced anything more than a white paper describing what they promise to do. There are no protections in place for you if anything goes wrong - most of the ICOs today use language such as ‘crowdsale’ or ‘donation’ to avoid legal requirements that come with security sales.
Since you do not have ownership rights in the company, there is no mechanism in place for distributing the profits from the company’s business operations if it does succeed. You will never receive a dividend. It’s also TBD on how governments will regulate or intervene in ICOs. China and South Korean have banned ICOs, and the SEC has warned startups that they could be violating securities laws with token sales.
ICOs may have gotten ahead of themselves, but the blockchain technology underpinning the ICOs and the cryptomarket will continually innovate and are here to stay. Tread carefully with ICOs - we believe in knowledge and transparency and do not believe in investing in something you do not fully understand.