The right way to do an ICO? Don’t do one!
Initial coin offerings (ICOs) have been flooding the crypto market. This year, we have already seen $6.3 billion being raised through coin offerings; with the first quarter of 2018 raising more money than the whole of last year.
ICOs are primarily used as a way to raise money. In simple terms, how it works is that an organisation with a new innovative project creates a whitepaper that describes all the financial, commercial and technological details of the project. During the ICO campaign, supporters of the project can then buy some of the distributed tokens with fiat or virtual currency, similar to how a company sells shares to investors in an IPO. Then, if the fund requirements are met, the money raised is used to initiate the project. Sounds cool right? Well, actually not so much. Read on to find out why David White, the CEO of Keybox strongly discourages entrepreneurs from carrying out an ICO at all.
“My conclusion with ICO’s is to not do one. I do not believe there is a compliant way of doing an ICO in the market today and I think it creates unnecessary risks for startups. Particularly, if you have access to the US market, one of the biggest risks you face is action from the SEC, which could in some cases result in jail,” declares David.
Yikes! No matter what jurisdiction you launch your ICO from, you need to follow a host of different security laws including stringent AML, ABC and KYC procedures. Because if you don’t, there is a likelihood of breaking the law, filing for bankruptcy or joining the “failed ICO group” which currently constitutes around half of the ICOs that launched last year . Plus, as David mentioned earlier in this article, accessing the US market poses a whole host of additional issues. This is because if a US citizen or company participates in an ICO, the Securities and Exchange Commission (SEC) will get involved both now and retrospectively. And considering the way that the SEC have defined a security, it is almost guaranteed that they will treat ICOs as security offerings not utility ones.
But not all ICOs fail. What about Telegram, deemed one of the most successful and largest ICOs having raised over 1.7 billion dollars earlier this year? However, according to David, it wasn’t an ICO at all.
“Telegram is regarded as one of the best ICOs, yet it wasn’t really an ICO. It’s been in private placement, only had institutional investors and raised over 1.7 billion dollars among 175 investors. It’s an interesting case study on the climate of fundraising at the moment. If you want to be seen as one of the ‘cool kids’ you label your fundraising as an ICO, even though I struggle to understand how raising 1.7 billion dollars in a private placement is an ICO.”
It is therefore not surprising that Keybox will in fact, not be doing an ICO to raise money. So what should startups looking to raise money do instead?
“Keybox likes the flexibility of a convertible debt offering. This will allow organisations to convert their debt into a coin only when the regulation is clear and easy to follow. In three years time, I don’t think it will be a question of how to deal with regulation, but more a question of how to best adhere to that regulation.”
In conclusion, I am by no means a lawyer, and none of the advice provided should be taken as legal advice. However, the fact remains that the current legal framework makes it extremely difficult to operate an ICO without the risk of breaching some aspect of the current investment regulation. As an entrepreneur managing risk is one of your core disciplines and to add the kind of additional risk that an ICO might present to the company seems ill advised. I do have high hopes that the regulatory environment for ICOs is improving and that a more lucid framework will be in place soon. Until then, back away from the seemingly shiny world of ICOs and consider alternative methods for raising funds.
