What is an ICO?
Initial Coin Offerings (ICO) – also called Initial Public Coin Offerings (IPCO) or Initial Token Offerings (ITO) – are all the rage in the blockchain world. An ICO is an instrument that raises funds for the development of a new cryptocurrency venture. Essentially, you trade mostly bitcoin or ether for a new cryptocurrency. After sending the funds to a smart contract, which stores the funds, if the ICO has respected all its conditions, the smart contract will automatically send an equivalent value of your initial investment in the new cryptocurrency.
ICOs, while likened to crowdfunding, are more aptly referred to as “crowdsales”. Crowdfunding initiatives are mostly supported through donations, but when there is an ICO, supporters receive an equivalent value of their investment in the new cryptocurrency, which has a specific purpose. ICOs also differ from the more traditional Initial Public Offering (IPO) in that they allow supporters – not just investors – to participate in the venture, without the emission of shares.
ICOs are also deemed to have a leaner regulatory structure and to be a faster process than IPOs. That is not often the case.
The purpose of the new cryptocurrency, or the tokens, received by supporters is usually either i) giving access to a protocol or network, such as an Air Miles card (utility token) or ii) for the token to appreciate in value (equity token). If one of the purposes of the ICO is to emit equity tokens, there are high chances the tokens are considered securities, which opens the door to a gray area filled with regulatory challenges.
Are ICOs regulated?
ICO regulation is still in flux. ICOs are often distinguished from securities and, as a result, are promoted as being unregulated. The ICOs projects therefore are launched in multiple jurisdictions without ensuring legal compliance in each country and with each ‘investor’. However, most ICOs are considered as emitting securities and compliance with securities laws should be ensured. In order to protect investors and guide companies going through the ICO process, bodies such as the Securities Exchange Commission (SEC) and the Canadian Securities Administrators (CSA), recently began exercising authority over ICOs as early as Summer 2017.
Additionally, a regulatory sandbox has been put in place throughout Canada in the past year in order to allow Fintech businesses to operate without applying certain laws that may impede in their innovation, while also protecting investors. In Quebec, the Autorité des marchés financiers (AMF) has taken a real interest in better understanding the distributed ledger technology by accepting Impak Finance as the first ICO in the Canadian regulatory sandbox for two years despite the fact that it has been identified as a security. Impak uses their coins to fuel social change by investing in socially-responsible companies that dedicate either their products, practices or profits seek to remedy a social or environmental issue.
A few days ago, the Ontario Securities Commission (OSC) has entered Token Funder Inc. into the regulatory sandbox with its ICO that intends to create a platform for crowdfunding and private placements of blockchain securities. The OSC is allowing the ICO to go forward with multiple exemptions to securities laws for a period of one year.
How to proceed with ICOs
Cryptocurrency is not without its flaws. Specifically, concerns have to do with ICO legitimacy, fraud and data protection. While provincial and federal regulators are allowing Fintech companies to innovate under specific guidelines, there are many ICOs taking place all over the world that are caught in a gray zone.
If purchasing, keep an eye out for red flags such as:
· Unlicensed sellers – unlicensed individuals or unregistered firms
· Guaranteed high returns on investment
· Absence of net worth or income requirements
If you want to start your ICO, you should consider applying for the regulatory sandbox and ensuring compliance with securities law and other applicable laws of each jurisdiction. There have been multiple guidelines published and even a first case law in the US. Of course, an attorney specialized in IT and business will be your best ally in this process.
Article written in collaboration with Olivia Gile, student at Juriseo. This article should not be considered as legal advice, but general information about ICOs. Don’t hesitate to contact Teodora at tniculae@juriseo.ca for all your ICO and cryptocurrency questions.
