The Curious Case of ICO
ICOs accounted for over 70% of blockchain funding in 2017, while in 2018 they represented less than 40%.
2017 was the best year ever, and not just because of Despacito and Donald Trump. ICOs were a groundbreaking event in the legal, regulatory and fundraising spheres. Public attention was focused on emerging blockchain technology worldwide, and the SEC and other regulators had to consider a new type of fundraising (or whatever “utility token” blabla this fundraising used).
I actually liked the way SEC pursued scam ICOs for non-protection of unqualified investors and determined the status of technology-based participation rights. Issuance of an investigative report on DAO in order to determine the status of tokens, application of the old-school Howey test in the context of this new legal phenomenon will be taught in law schools for years to come (at least my LLM students will work on that😊). The financial regulations created to protect investors’ rights after the financial crisis in 1929 proved they were fit for 21st century challenges.
The bursting of the ICO bubble was followed by several large lawsuits. The most famous is the Polybius case brought to court in Zug. My favorite case is ENVION, since it led to a no-holds-barred corporate dispute. The two shareholder groups fought over control of ENVION AG before a German court, while investors filed lawsuits against ENVION and the founders because of their false ICO prospectus.
ICOs attracted public attention of all over the world. It provided a large number of people with an easily accessible investment opportunity. The popularity of ICOs was fueled by ‘easy come, easy go’ crypto-currencies and lack of other affordable financing and investment instruments to make equity investments into private companies.
So-called ‘crypto-hamsters’ and ‘ICO-rednecks’ started to allocate their cash and crypto massively into unverified narratives. Trust in the trustless was as cool as Ed Sheeran but the aforementioned lawsuits and massive financial losses of ICO investors prove this this trust(less) was misplaced.
Making early-stage investments is like playing in a casino: one could easily lose a fortune waiting for a unicorn in startup-roulette. Thus, requirements for accreditation and qualification of investors should be followed in any fundraising attempt. Good due diligence of a team, personal guarantees, and collateral from founders are still missing in the ICO ecosystem.
Various countries gambled on promoting their jurisdictions by implementing a regulatory framework for crypto and ICOs: Switzerland, Malta, Gibraltar, Belarus and more.
In Belarus, a bunch of legislation was dedicated to crypto and ICOs. No company has made an ICO under Belarusian laws yet and, presumably, no such ICO will appear, so the government sighed with relief and pivoted to the narrative that all crypto-laws were just for promotion of other incentives offered for IT companies. By the way, a good excuse to justify a failed attempt😊, but it’s fair to say that tax incentives for IT companies in Belarus are great (1% from revenues, no CIT, no VAT).
A huge infrastructure was created around ICOs at short notice: conferences, media portals, service providers of various kinds, financial institutions assisting in money withdrawal and conversion of tokens, security experts, hardware solutions. I believe it’s a positive vibe too: evidencing how fast we are capable to build and scale ecosystems and communities around emerging technology.
It was exciting to watch how fast a new generation of lawyers claiming expertise in ICOs and blockchain appeared. In the absence of regulations, lawyers working on ICOs became international, bypassing jurisdictional barriers. By the way, my favorite new-wave crypto-expert is Pavan Duggal, who wrote a 42-page book on Belarus crypto laws before any local lawyer did😊(still available on Amazon for $12).
During the course of time, ICOs moved from a grey area to a more proven track. Now startups prefer to raise from VCs, using classical financing instruments and token sales are compliant with securities regulations and fundraising mechanics looking more like private placements. Startups that are raising are focused on fundamental blockchain technologies rather than crypto hype. I guess the world will be missing crypto kittens and crypto worms but not miss the ICO hype industry and its “advisors”.
Generally, the 2016–2017 ICO boom was a quite an interesting phenomenon from various perspectives. It revealed that there is plenty of money and greed in the world and so people need to be protected against scams.
Will the world ever see a buzz like 2017 crypto mania ever again? Let’s think of the ICO era as the kids deciding they should be in charge but when daddy SEC and mommy ESMA come home ultimately everyone agrees that candy isn’t really a balanced breakfast. It’s probably a good thing that the parents are now back in charge.
Irina Hliabovich
VC girl, legal-tech geek
