What is an ICO?

The abbreviation ICO stands for Initial Coin Offering, that is, the initial placement of coins (tokens). During the ICO, the project team sells digital tokens for crypto currency or fiat money to investors. Later, these coins can be used on the project platform as an internal currency or traded on exchanges. Also, instead of ICO, the term “crowdsale” is often used.

For what purpose, do the projects carry out ICOs?

By issuing their own tokens and exchanging them for popular crypto-currencies (for example, bitcoin or Ethereum) or for fiat currencies (dollars or euros), the project attracts funding needed for launch or development. Usually, ICO is conducted early in the life of projects, Their full-fledged infrastructure. The funds raised are used to finance the final stage of development, marketing or are sent to special development funds to support projects in the long term.

What is the legal status of the ICO?

Now ICO cannot be called a legal or illegal way of attracting investments. Its legal status, procedure and requirements for companies that are going to raise funds in this way are not currently defined in any country in the world. Moreover, it is difficult to determine the legal nature of the relations that arise during the ICO. As financial relations in their classic understanding of such a relationship is difficult to call. At the same time, it is safe to say that this process is based on the reputation of the people behind the crypto-currency start-up, and the trust of users (potential investors).

Can I compare ICO with an IPO?

When the company wants to offer its shares to the general public, it conducts an IPO (Initial Public Offering – an initial public offering on the stock exchange). The ICO can work in a similar way: investors invest in a “share” in the company in the form of cryptographic tokens. At the same ICO has similarities with crowdfunding: funds are usually collected to implement a certain idea, that is, at a stage when the project does not have a finished product.

At the same time, IPO is regulated by national legislation. For example, in the US for public offering of shares the company must be incorporated as a joint stock company, and also registered with the SEC (Securities and Exchange Commission). All this makes the process of attracting investments in the project at an early stage of its development more difficult, but it provides certain guarantees to investors.

In the case of ICO, the process of attracting investments is much easier, but users are not insured in any way.

What attracts investors to ICO?

By purchasing the tokens offered at ICO, investors primarily count:

  • Get the benefit of selling them at a higher price in the future (a classic example is Ethereum, whose tokens cost less than one cent during the ICO in the summer of 2014, and this summer their price has risen to almost $ 400);
  • To use tokens for their intended purpose, having received the claimed services at a lower price.

What are the risks when participating in the ICO?

Perhaps the biggest risk can be called ordinary fraud, when the creators of the project pursue only one goal: to collect user money. In addition, since laws that would regulate the conduct of crypto currency crusades, at the moment doesn’t exist, from the position of the investor this transaction is always based on trust. It cannot be ruled out that the project may not survive to the stage of product appearance or disappoint the investor with its implementation.

In addition, in its current form, ICOs are usually held in one round, and the chances of obtaining additional funding from them are small. This can also be seen as a potential risk in terms of the long-term existence of the project.

What should I look for before attending the ICO?

The abundance of different ICOs can confuse many inexperienced investors. Therefore, first of all, it is necessary to carefully study the sale agreement (Token Sale Agreement). When reading this document, curious details may come up to the surface, which the organizers of the ICO may not have publicly announced. In addition, there are unspoken indicators of the conscientious intentions of the project:

  • Availability of all necessary agreements and rules published on the website as a public offer.
  • Ready working prototype.
  • Competently composed whitepaper and the rest of the documentation.
  • The presence of escrow (a special conditional account, which takes into account property, documents or cash prior to the occurrence of certain circumstances or the performance of certain obligations).
  • Incorporation (registration) of the company itself.
  • The unblemished reputation of the people behind the project.

What were the examples of the most successful ICO?

The success of ICO – a thing quite conditional. However, the amount of funds collected is considered to be a generally accepted indicator. From this point of view, leadership at the moment (we are talking about dry statistics, discarding other arguably controversial aspects of the campaigns) belongs to the Bancor project, which in June 2017 collected 396,720 ETH in less than three hours. An example of another rapid crowdsdale was an innovation campaign Browser Brave: in about 30 seconds the project managed to achieve a financial goal and collect $ 35 million.

In May 2017, the list of successful crypto currency cranes was added to Storj projects ($ 30 million in less than a week) and Aragon – in just 15 minutes from the start of ICO, the project collected the planned 275,000 ETH (about $ 25 million).

You can also recall the projects mobileGo ($ 53 million), Gnosis ($ 12.5 million for 10 minutes), Blockchain Capital ($ 10 million for two hours), Aeternity (23.4 CHF) and, finally, project of the Ethereum network project Status (about $ 100 million).

Also, do not forget about the already become part of the history of the crypto currency world project The DAO, as a result of the collapse of which in the summer of 2016 appeared Ethereum Classic.

About 5,000 BTC – this is the amount of funds attracted by the project MasterCoin (now Omni) during the first ever crypto currency fund-raising, which took place in the summer of 2013.

After only one year, Ethereum attracted more than 30,000 BTC in the course of crowdsale. In 2016, about 30,000 BTC manages to attract the Waves blocking platform and the DAO’s decentralized venture fund collects a record amount of crypto-currency investments – more than 12 million ETH. The total amount of investments attracted to the projects of The DAO, Ethereum and Waves is almost $ 195 million.

Despite the fact that more than three years have passed since the first collection of funds in the crypto currency, to this day, many ICOs and crowdsales resemble the sale of corporate rights of a company that does not exist, for example an agreement of intent, In which the party undertook the obligation to establish it. That is, there is no legal entity, no obligation to establish it, no shares. There is only landing page, thread on bitcointalk and beautiful infographics with an intricate roadmap. Maybe a short video about the project with a funny voice acting.

However, not all projects indicate data about members of the project team or place at least some minimal Token Sale Conditions on the website, didn’t mention the terms (rules) for using the service. Not completely understandable, for whatever reason, but many investors like it that way. More precisely, I liked it until recently.

FirstBlood, ICONOMI and SingularDTV (the latter collected 7.5 million dollars in about 15 minutes), this is an incomplete list of projects that took the step to conducting crowdsales as much as possible in the legal field: the projects established a legal entity and published in one form or another the rules for holding ICO, with which the user consented during the use of the website, registration or purchase of tokens.

Legal Status of ICO

At the same time, neither ICO or crowdsale can be called both legal and illegal ways of attracting investments in the project. Their legal status, procedures and requirements for companies that are going to raise funds in this way are not currently defined in any country in the world excepting Japan. There are also no unofficial rules for conducting them, with which it would be possible to familiarize themselves with a generally recognized resource and with which most of the crypto community agree.

In fact, the crypto-currency activity is carried out in the informal sector of the economy (System D), and the status of the crypto-currency itself is in a legal vacuum (the so-called “gray zone”). In addition, it is difficult to determine the legal nature of the relationship arising in the conduct of ICO or crowdsale. After all, it is difficult to call them classic financial relations.

At the same time, it is safe to say that the basis of such relations is the reputation of the people behind the crypto-currency start-up, and the trust of users (potential investors). One of the brightest examples is the crowdsale of the Kuna Exchange, the success of which directly depended on the reputation of its founder, Mikhail Chobanyan.

What do have in common IPO and crowdfunding?

ICO can be viewed as an analogue of Initial Public Offering, and crowdsale as an analogue of crowdfunding.

The difference is that when an IPO an investor receives real shares, and in the case of ICO – so-called crypto-actions – cryptographic tokens that are not in fact shares, but allow the investor to receive a part of the company’s profit. A similar difference between crowdinvesting and crowdsale.

In addition, the conduct of an IPO and crowdinvesting is usually regulated by national legislation (as opposed to ICO and crowdsale).

So, for example, in the United States for public offering of shares, their issuer (a company necessarily incorporated as a joint stock company) must be registered with the SEC (Securities and Exchange Commission). The registration process itself is complex and lengthy.

At the same time, the company needs to disclose a sufficiently large amount of information (including financial reporting). At the same time, each stock exchange establishes its own requirements to the issuer for the listing procedure (inclusion of securities on the exchange list). So, the exchange can determine the necessary number of shareholders, the size of the company’s income for the last year or the value of assets, etc.

Crowdfunding in the US is possible only on special portals for fundraising or through brokers. Crowdinvestors and Owners of company have the right to provide relevant services only after registration with the SEC. There are also restrictions on the amount of money that a company can collect. At the same time, as in the case of an IPO, the issuer must provide the SEC and investors with financial statements and some other information.

All this complicates the process of attracting investments in the project at an early stage of its development, but at the same time provides guarantees to investors. In the case of ICO, the process of attracting investments is much easier, but users are not insured in any way.

Can a stock exchange trading crypto currency, instead of spending on crowdsale, raise funds with the help of crowdinvesting, thus providing the appropriate guarantees to investors? Definitely yes. Moreover, Bitstamp, Kraken and ShapeShift in this way carried out fund-raising.

And in general, now any crypto-currency project can absolutely legally conduct crowdinvesting, and the investor, accordingly, receive shares of the real company. It is possible to do this, for example, via the BnkToTheFuture platform.

What needs a potential ICO participant to do?

First of all, you need to keep in mind that the content of beautiful posts on bitcointalk differs significantly from the provisions in the same Token Sale Agreement. And often after acquaintance with the latter it turns out that the tokens are confirmed not by the corporate rights of ICO participants, but, for example, their rights to participate in the project (or in the system).

In most cases, the sales agreement expressly provides that the tokens are not shares or other securities. In this case, except as “candy wrappers”, they cannot be called in another way.

Moreover, as a rule, when buying a token or even simply using the site, the user confirms that he has sufficient knowledge of crypto-currencies and lock-up, as well as the necessary knowledge in order to participate in the ICO. After that, he becomes a participant in crypto-currency fundraising at his own risk and at the same time refuses claims to the company and the possibility of reimbursement of his funds.

There are probably already many people who have written about the capslock provisions regarding the user’s denial of guarantees from the company (Disclaimer of Warranties) and limitations of liability of the latter (Limitation of Liability). But for some reason, not every member of the crowdsale reads them.

At first glance it may seem that the rules posted on the site, are made in this way as you cannot pay due attention and do not get acquainted with them. But in fact, they are binding on the parties to the agreement. This is exactly the case when you need to be a real healer and question every phrase on the site or in social networks, no matter how beautiful it sounds. Because in the rules for conducting an ICO or in an agreement on the sale of tokens, the language may differ materially.

This is difficult, and, as practice shows, not every potential investor of a crypto-currency project is ready to waste time on proofreading even a few pages of the agreement in English. Many are just limited to threading a bitcointalk and describing the project and crowdsale on the site, not even reading Whitepaper.

But even in this case, users have a choice – to contact third-party companies or familiar experts to audit such a project and its ICO. Well, as for the crypto-currency projects themselves, they have long ago ordered crowdsale “on a turn-key basis” from all the same companies or individual experts.

Summing up, we recall that we should not forget about the unspoken indicators of the conscientious intentions of the project, which conducts crypto-currency fundraising:

  • Availability of all necessary agreements and rules published on the website as a public offer.
  • Ready working prototype.
  • Competently composed by WP and other documentation.
  • The presence of escrow (a special conditional account, which takes into account property, documents or cash prior to the occurrence of certain circumstances or the performance of certain obligations).
  • Incorporation (registration) of the company itself.
  • The unblemished reputation of the people behind the project.

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